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 March 31, 2012 and December 31, 2011, aggregated by the level in the fair value hierarchy within which those measurements fall:



	At March 31, 2012		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	$	12,666	$	9,463	$	3,203	$	—
Government-sponsored entities	349,133		—		349,133		—
Corporate bonds	4,950		—		4,950		—
Municipal bonds	198,968		—		198,968		—
Mortgage-backed securities	259,327		—		259,327		—
Other	570		570		—		—
Total available for sale securities	825,614		10,033		815,581		—
Derivatives - interest rate customer swaps	3,930		—		3,930		—
Derivatives - customer foreign exchange forward	51		—		51		—
Other investments	5,821		5,082		739		—
Liabilities:
Derivatives - interest rate customer swaps	$	4,008	$	—	$	4,008	$	—
Derivatives - customer foreign exchange forward	51		—		51		—
Derivatives - junior subordinated debenture interest rate swap	5,170		—		5,170		—



			Fair value measurements at reporting date using:
	At December 31, 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:
Available for sale securities
U.S. government and agencies	$	4,602	$	1,002	$	3,600	$	—
Government-sponsored entities	379,423		—		379,423		—
Corporate bonds	4,912		—		4,912		—
Municipal bonds	200,675		—		200,675		—
Mortgage-backed securities	254,344		—		254,344		—
Other	540		540		—		—
Total available for sale securities	844,496		1,542		842,954		—
Derivatives - interest rate customer swaps	4,207		—		4,207		—
Derivatives - customer foreign exchange forward	7		—		7		—
Other investments	5,317		4,493		824		—
Liabilities:
Derivatives - interest rate customer swaps	$	4,366	$	—	$	4,366	$	—
Derivatives - customer foreign exchange forward	7		—		7		—
Derivatives - junior subordinated debenture interest rate swap	5,308		—		5,308		—

At March 31, 2012, available for sale securities consist primarily of U.S. government and agency securities, government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities, and other available for sale securities. The U.S. government securities and equities (which are categorized as other available for sale securities) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities, and certain investments in Small Business Administration ("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. No investments held at March 31, 2012 were categorized as Level 3.

At December 31, 2011, available for sale securities consist primarily of U.S. government and agency securities, government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities, and other available for sale securities. The U.S. government securities and equities (which are categorized as other available for sale securities) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities, corporate bonds, municipal bonds, mortgage-backed securities, and certain investments in 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. No investments held at December 31, 2011 were categorized as Level 3.

The Company uses interest rate customer swaps and a junior subordinated debenture interest rate swap to manage its interest rate risk, and customer foreign exchange forward contracts to manage its foreign exchange risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves and implied volatilities. Therefore, they have been categorized as a Level 2 measurement. 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 met the criteria for and, effective January 1, 2012, elected to apply the accounting policy exception with respect to measuring counterparty credit risk for derivative transactions subject to master netting arrangements provided in Accounting Standards Updates ("ASU") 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS ("ASU 2011-04"). Electing this policy exception had no impact on financial statement presentation.

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 current or former 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 months ended March 31, 2012 and 2011, respectively.

Balance at

January 1, 2012

Purchase, (sales),

issuances and

(settlements), net

Transfers

into (out of)

Level 3

Unrealized

gains

(losses)

Amortization

Balance at

March 31, 2012

(In thousands)

Other available for sale investments

—

Total Level 3 assets

—



	Balance at January 1, 2011		Purchase, (sales), issuances and (settlements), net		Transfers into (out of) Level 3		Unrealized gains (losses)		Amortization		Balance at March 31, 2011
	(In thousands)
Other available for sale investments	$	750	$	—	$	—	$	—	$	—	$	750
Total Level 3 assets	$	750	$	—	$	—	$	—	$	—	$	750

The following tables present the Company's assets and liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2012 and 2011, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall.



	March 31, 2012		Fair value measurements recorded during the three months ended:
	March 31, 2012		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
Assets:
Impaired loans (1)	$	4,894	$	—	$	—	$	4,894
OREO (2)	198		—		—		198
	$	5,092	$	—	$	—	$	5,092

___________________


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


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



	March 31, 2011		Fair value measurements recorded during the three months ended:
	March 31, 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)	$	26,022	$	—	$	—	$	26,022
OREO (2)	3,186		—		—		3,186
	$	29,208	$	—	$	—	$	29,208

___________________


(1)	Collateral-dependent impaired loans held at March 31, 2011 that had write-downs in fair value or whose specific reserve changed during the first quarter of 2011.


(2)	Two OREO properties held at March 31, 2011 had write-downs during the first quarter of 2011.

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



	March 31, 2012
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	4,894	Appraisals of Collateral	Discount for costs to sell	7% - 25%	9%
Impaired Loans	$	4,894	Appraisals of Collateral	Appraisal adjustments	0% - 25%	5%
OREO	$	198	Appraisals of Collateral	Discount for costs to sell	9%	9%
OREO	$	198	Appraisals of Collateral	Appraisal adjustments	—%	—%

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. The appraisers use a market, income, and/or a cost approach in determining the value of the collateral. Therefore they have been categorized as a Level 3 measurement.

The OREO in the tables above includes those properties that had an adjustment to fair value during the three months ended March 31, 2012 and 2011, respectively. The Company uses appraisals, which management may adjust to reflect estimated fair value declines, or may apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property or consideration of broker quotes. The appraisers use a market, income, and/or a cost approach in determining the value of the collateral. Therefore they have been categorized as a Level 3 measurement.

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



	March 31, 2012
	Book Value		Fair Value		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)
	(In thousands)
FINANCIAL ASSETS:
Cash and cash equivalents	$	131,136	$	131,136	$	131,136	$	—	$	—
Loans, net (including loans held for sale)	4,754,873		4,795,625		—		—		4,795,625
Other financial assets	120,335		120,335		—		120,335		—
FINANCIAL LIABILITIES:
Deposits	4,602,451		4,606,940		—		4,606,940		—
Securities sold under agreements to repurchase	108,551		111,295		—		111,295		—
Federal Home Loan Bank borrowings	582,551		607,305		—		607,305		—
Junior subordinated debentures	178,645		166,701		—		166,701		—
Other financial liabilities	11,541		11,541		—		11,541		—



	December 31, 2011
	Book Value		Fair Value
	(In thousands)
FINANCIAL ASSETS:
Cash and cash equivalents	$	203,354	$	203,354
Loans, net (including loans held for sale)	4,567,183		4,631,890
Other financial assets	120,097		120,097
FINANCIAL LIABILITIES:
Deposits	4,530,411		4,538,137
Securities sold under agreements to repurchase	130,791		133,660
Federal Home Loan Bank borrowings	521,827		547,584
Junior subordinated debentures	182,053		165,242
Other financial liabilities	11,388		11,388

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

The fair value estimates provided are made at a specific point in time, based on relevant market information and the characteristics of the financial instrument. The estimates do not provide for any premiums or discounts that could result from concentrations of ownership of a financial instrument. Because no active market exists for some of the Company's financial instruments, certain fair value estimates are based on subjective judgments regarding current economic conditions, risk characteristics of the financial instruments, future expected loss experience, prepayment assumptions, and other factors. The resulting estimates involve uncertainties and therefore cannot be determined with precision. Changes made to any of the underlying assumptions could significantly affect the estimates.

Cash and cash equivalents

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

Loans, net (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 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. Loans are included in the Level 3 fair value category based upon the inputs and valuation techniques used.

Other financial assets

Other financial assets consist of accrued interest and fees receivable, stock in 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.

The Company carries the FHLB stock at the original cost basis (par value) and is classified as Level 2. 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 FHLBs of San Francisco and Seattle is still owned by the Bank. At the time of the bank merger there were outstanding FHLB borrowings with both the FHLBs of San Francisco and Seattle. Until these borrowings in the FHLBs of San Francisco and Seattle mature and are subsequently paid off, the FHLB stock associated with these borrowings cannot be redeemed. The Bank has requested to redeem the excess FHLB stock in these two FHLBs above the amount required for the related borrowings. The FHLBs may wait up to five years from the redemption request to redeem the stock. Of the $42.6 million of stock in FHLBs held at March 31, 2012, $13.6 million, or 32%, of the balance related to stock held in the FHLBs of San Francisco and Seattle.

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 and first quarter 2012 redemptions at par of a portion of FHLB stock held in the Boston and San Francisco FHLBs.

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.

Federal Home Loan Bank borrowings

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

Junior subordinated debentures

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was based on the current market price of the securities at March 31, 2012 and December 31, 2011 and have been classified as Level 2. The fair value of the junior subordinated debentures issued by Boston Private Capital Trust II and the junior subordinated debentures acquired in the FPB, 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 and are classified as Level 2.

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.