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 June 30, 2011 and December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall:



	At June 30, 2011		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	$	6,754	$	3,008	$	3,746	$	—
Government-sponsored entities	346,696		—		346,696		—
Corporate bonds	13,879		—		13,879		—
Municipal bonds	189,191		—		189,191		—
Mortgage-backed securities	233,701		—		233,701		—
Other	3,401		604		2,047		750
Total available for sale securities	793,622		3,612		789,260		750
Derivatives—interest rate customer swaps	4,268		—		4,268		—
Derivatives—customer foreign exchange forward	187		—		187		—
Other investments	5,994		4,994		1,000		—
Liabilities:
Derivatives—interest rate customer swaps (1)	$	4,389	$	—	$	4,389	$	—
Derivatives—customer foreign exchange forward (1)	187		—		187		—
Derivatives-junior subordinated debenture interest rate swap (1)	3,305		—		3,305		—

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(1) Derivatives-interest rate customer swaps and customer foreign exchange forward (liabilities) are netted with the derivative assets within other assets in the consolidated balance sheets.



			Fair value measurements at reporting date using:
	At December 31, 2010		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	$	81,402	$	72,972	$	8,430	$	—
Government-sponsored entities	263,599		—		263,599		—
Corporate bonds	18,816		—		18,816		—
Municipal bonds	194,048		—		194,048		—
Mortgage-backed securities	234,257		—		234,257		—
Other	3,316		539		2,027		750
Total available for sale securities	795,438		73,511		721,177		750
Derivatives - interest rate customer swaps	4,862		—		4,862		—
Derivatives - customer foreign exchange forward	130		—		130		—
Other investments	10,828		4,723		6,105		—
Liabilities:
Derivatives - interest rate customer swaps (1)	$	5,049	$	—	$	5,049	$	—
Derivatives - customer foreign exchange forward (1)	130		—		130		—
Derivatives - junior subordinated debenture interest rate swap (1)	2,342		—		2,342		—

___________________

(1) Derivatives - interest rate customer swaps (liabilities) are netted with the derivative assets within other assets in the consolidated balance sheets.

At June 30, 2011 and December 31, 2010, available for sale securities consist primarily of U.S. government and agency securities, government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities (primarily residential), and other available for sale securities. The U.S. government securities, and equities and mutual funds (which are categorized as other available for sale securities) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities, and certain investments in Small Business Association ("SBA") loans (which are categorized as U.S. government and agencies available for sale 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. The remaining investments - three Community Reinvestment Act (“CRA”) loan funds (which are categorized as other available-for-sale securities) - had unobservable inputs and are not actively traded. The value for these securities is determined by third party pricing models. Therefore, they have been categorized as a Level 3 measurement.

Currently, the Company uses interest rate customer swaps and a junior subordinated debenture interest rate swap to manage its interest rate risk, and customer foreign exchange forward contracts to manage its foreign exchange risks. 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. 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.

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.

Other investments, which are not considered available for sale investments, consist of deferred compensation trusts for the benefit of certain employees, 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. The remaining other investments categorized as Level 2 consist of the Company's cost-method investments.

The following tables present a rollforward of the Level 3 assets for the three and six months ended June 30, 2011 and June 30, 2010, respectively. The unrealized gains/ (losses) on the Level 3 assets included in the table below are included in Accumulated comprehensive income in the consolidated balance sheets.



	Balance at March 31, 2011		Purchase, (sales), issuances and (settlements), net		Transfers into (out of) Level 3		Unrealized gains (losses)		Amortization		Balance at June 30, 2011
	(In thousands)
Other available for sale investments	$	750	$	—	$	—	$	—	$	—	$	750
Total Level 3 assets	$	750	$	—	$	—	$	—	$	—	$	750



	Balance at January 1, 2011		Purchase, (sales), issuances and (settlements), net		Transfers into (out of) Level 3		Unrealized gains (losses)		Amortization		Balance at June 30, 2011
	(In thousands)
Other available for sale investments	$	750	$	—	$	—	$	—	$	—	$	750
Total Level 3 assets	$	750	$	—	$	—	$	—	$	—	$	750



	Balance at March 31, 2010		Purchase, (sales), issuances and (settlements), net		Transfers into (out of) Level 3		Unrealized gains (losses)		Amortization		Balance at June 30, 2010
	(In thousands)
Mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—
Other available for sale investments	500		—		—		—		—		500
Total Level 3 assets	$	500	$	—	$	—	$	—	$	—	$	500



	Balance at January 1, 2010		Purchase, (sales), issuances and (settlements), net		Transfers into (out of) Level 3			Unrealized gains (losses)		Amortization		Balance at June 30, 2010
	(In thousands)
Mortgage-backed securities (1)	$	3,151	$	—	$	(3,151	)	$	—	$	—	$	—
Other available for sale investments	500		—		—			—		—		500
Total Level 3 assets	$	3,651	$	—	$	(3,151	)	$	—	$	—	$	500

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(1) One mortgage-backed security was originally categorized as a Level 3 measurement because its value was being determined by a third party pricing matrix. During the first quarter of 2010, the Company was able to obtain pricing information and market data from similar assets, and therefore the security was changed to a Level 2 measurement.

The following tables present the Company's assets and liabilities measured at fair value on a non-recurring basis during the three and six month periods ended June 30, 2011 and during the year ended December 31, 2010, aggregated by the level in the fair value hierarchy within which those measurements fall.



	June 30, 2011		Fair value measurements recorded during the three months ended:
	June 30, 2011		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
	(In thousands)
Assets:
Impaired loans(1)	$	5,795	$	—	$	—	$	5,795
OREO	—		—		—		—
	$	5,795	$	—	$	—	$	5,795

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(1)	Collateral-dependent impaired loans held at June 30, 2011 that had write-downs in fair value or whose specific reserve changed during the second quarter of 2011.



	June 30, 2011		Fair value measurements recorded during the six months ended:
	June 30, 2011		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
	(In thousands)
Assets:
Impaired loans(1)	$	15,873	$	—	$	—	$	15,873
OREO(2)	3,186		—		—		3,186
	$	19,059	$	—	$	—	$	19,059

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(1)	Collateral-dependent impaired loans held at June 30, 2011 that had write-downs in fair value or whose specific reserve changed during the first six months of 2011.


(2)	Two OREO properties held at June 30, 2011 had write-downs during the first six months of 2011.



	December 31, 2010		Fair value measurements recorded during the year:
	December 31, 2010		Quoted prices in active markets for identical assets (level 1)		Significant other observable inputs (level 2)		Significant unobservable inputs (level 3)
	(In thousands)
Assets:
Impaired loans(1)	$	32,790	$	—	$	—	$	32,790
Loans held for sale(2)	1,526		—		—		1,526
OREO(3)	2,878		—		—		2,878
	$	37,194	$	—	$	—	$	37,194

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(1)	Collateral-dependent impaired loans held at December 31, 2010 that had write-downs in fair value or whose specific reserve changed during 2010.


(2)	One loan in the loans held for sale category had a write-down during 2010.


(3)	Three OREO properties held at December 31, 2010 had write-downs during 2010.

Impaired loans include those loans that were adjusted to the fair value of underlying collateral as required under ASC 310. 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. Therefore they have been categorized as a Level 3 measurement.

The loan held for sale in the table above represents the last loan in Southern California transferred to the held for sale category in the third quarter of 2008, which had an adjustment to fair value during the year ended December 31, 2010. The fair value of this loan held for sale was based on appraised value, and as necessary on broker quotes, comparable market transactions and information from the Company's agent engaged to assist with the sale of the loan. Therefore the loan has been categorized as a Level 3 measurement.

The OREO in the tables above includes those properties that had an adjustment to fair value during the periods ended June 30, 2011 and December 31, 2010, respectively. 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. Therefore they have been categorized as a Level 3 measurement.

The following table presents 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):



	June 30, 2011				December 31, 2010
	Book Value		Fair Value		Book Value		Fair Value
	(In thousands)
FINANCIAL ASSETS:
Cash and cash equivalents	$	472,555	$	472,555	$	494,439	$	494,439
Held to maturity securities	—		—		2,515		2,497
Loans, net (including loans held for sale)	4,315,323		4,376,159		4,391,089		4,458,519
Other financial assets	120,828		120,828		121,977		121,977
FINANCIAL LIABILITIES:
Deposits	4,551,319		4,559,098		4,486,726		4,494,884
Securities sold under agreements to repurchase	122,448		125,818		258,598		262,344
Federal Home Loan Bank borrowings	523,695		545,282		575,682		597,023
Junior subordinated debentures	188,645		166,589		193,645		168,235
Other financial liabilities	13,734		13,734		13,133		13,133

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.

Held to maturity securities

The fair value presented for securities are based on quoted market prices received from third party pricing services, where available. If quoted market prices were not available, fair values were based on quoted market prices of comparable instruments, quotations, or analysis of estimated future cash flows. As of January 1, 2011, the Company reclassified its held to maturity investments to available for sale investments and other assets. See Part II. Item 8. "Financial Statements and Supplementary Data - Note 5: Investment Securities" for further details.

Loans, net (including loans held for sale)

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 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 incremental credit risk for non-accrual loans was considered in the determination of the fair value of loans. 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.

Other financial assets

Other financial assets consist primarily 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.

The Company carries the FHLB stock at the original cost basis (par value). Subsequent to the bank merger on May 27, 2011, the only FHLB that the Bank is a member of is Boston. FHLB stock in both the San Francisco and Seattle FHLBs is still owned by the Bank. The Bank has requested to redeem the outstanding stock in these two FHLBs. The FHLBs may wait up until five years from the redemption request to redeem the stock.

At each period end, the Company evaluates its investment in the respective FHLB's stock for other-than-temporary impairment. The Company has not recognized an other-than-temporary impairment loss with respect to stock in the FHLBs, based on the following considerations: the Company's evaluation of the underlying investment, including the long-term nature of the asset; the liquidity position of the respective FHLBs; the actions being taken by the respective FHLBs to address their regulatory situations; the improving financial position; and the 2011 redemptions at par of a portion of FHLB stock held in the San Francisco FHLB.

Deposits

The fair values reported for transaction accounts (demand, NOW, savings, and money market) equal their respective book values reported on the balance sheets. 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.

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 Company's incremental borrowing rate for FHLB borrowings with similar maturities.

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 Company's estimated current incremental borrowing rate for FHLB borrowings of similar maturities.

Junior subordinated debentures

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was based on the current market price of the securities at June 30, 2011 and December 31, 2010. The fair value of the junior subordinated debentures issued by Boston Private Capital Trust II and the junior subordinated debentures acquired in the FPB, Gibraltar Private Bank and Trust Company ("Gibraltar") (acquired as part of the 2005 acquisition of Gibraltar which was subsequently sold in 2009), and Charter acquisitions approximates book value because of the floating rate nature of the securities.

Other financial liabilities

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

Financial instruments with off-balance sheet risk

The Company'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.