EMPLOYEE BENEFITS

Employee 401(k) Profit Sharing Plan

The Company established a corporate-wide 401(k) Profit Sharing Plan (the “Plan”) for the benefit of the employees of the Company and its affiliates, which became effective on July 1, 2002. The Plan is a 401(k) savings and retirement plan that is designed to qualify as an ERISA section 404(c) plan. Generally, employees who are at least twenty-one (21) years of age are eligible to participate in the plan on their date of hire. Employee contributions may be matched based on a predetermined formula and additional discretionary contributions may be made. Consolidated 401(k) expenses for all plans were $2.4 million, $2.6 million, and $2.5 million, in the years ended December 31, 2013, 2012, and 2011, respectively.

Salary Continuation Plans

The Bank’s San Francisco Bay market, formerly Borel, maintains a salary continuation plan for certain current or former officers. The officers become eligible for benefits under the salary continuation plan if they reach a defined retirement age while working for the Bank. The San Francisco Bay market also has a deferred compensation plan for certain former directors. The compensation expense relating to each contract is accounted for individually and on an accrual basis. The expense relating to these plans was $0.1 million, $0.2 million, and $0.1 million for the years ended December 31, 2013, 2012, and 2011, respectively. The amount recognized in other liabilities in the consolidated balance sheets was $1.7 million and $1.6 million at December 31, 2013 and 2012, respectively. The Bank has purchased life insurance contracts to help fund these plans. The Bank has single premium life insurance policies with cash surrender values totaling $5.8 million and $6.2 million, which are included in other assets in the consolidated balance sheets, as of December 31, 2013 and 2012, respectively.

The Bank’s Southern California market, formerly FPB, maintains a salary continuation plan for certain current or former officers. The plan provides for payments to the participants at the age of retirement. The expense relating to these plans was $0.2 million, for each of the years ended December 31, 2013, 2012, and 2011. The net amount recognized in other liabilities in the consolidated balance sheets was $2.1 million and $1.9 million at December 31, 2013 and 2012, respectively. The Bank has purchased life insurance contracts to help fund these plans. These life insurance policies have cash surrender values totaling $4.5 million and $4.3 million at December 31, 2013 and 2012, respectively, which are included in other assets in the consolidated balance sheets.

Deferred Compensation Plan

The Company offers a deferred compensation plan that enables certain executives to elect to defer a portion of their compensation. The amounts deferred are excluded from the employee’s taxable income and are not deductible for income tax purposes by the Company until paid. The employee selects from a limited number of hypothetical mutual funds and the deferred liability is increased or decreased to correspond to the fair value of these underlying hypothetical mutual fund investments. The net amount recognized in other liabilities in the consolidated balance sheets was $5.8 million and $5.9 million at December 31, 2013 and 2012, respectively. The change in value is recognized as compensation expense. The expense relating to these plans was $0.9 million, $0.5 million, and $0.2 million for the years ended December 31, 2013, 2012, and 2011, respectively. The Company established and funded a Rabbi Trust to offset this liability. The Rabbi Trust holds similar assets and approximately mirrors the activity in the hypothetical mutual funds. The net amount recognized in other assets in the consolidated balance sheets was $5.1 million and $5.2 million at December 31, 2013 and 2012, respectively. Increases and decreases in the value of the mutual funds in the Rabbi Trust are recognized in other income in the consolidated statement of operations. The income relating to this plan was $1.0 million, $0.5 million, and $0.3 million for the years ended December 31, 2013, 2012, and 2011, respectively.

Stock-Based Incentive Plans

At December 31, 2013, the Company has four stock-based compensation plans. These plans encourage and enable the officers, employees, and non-employee directors of the Company to acquire a proprietary interest in the Company.

The 2009 Stock Option and Incentive Plan (the “2009 Plan”), replaced the Company’s 2004 Stock Option and Incentive Plan. Under the 2009 Plan, the Company may grant options, stock appreciation rights, restricted stock, restricted stock units, unrestricted stock awards, performance share awards and dividend equivalent rights to its officers, employees, and non-employee directors of the Company for an amount not to exceed 2% of the total shares of common stock outstanding as of the last business day of the preceding fiscal year. The 2009 Plan provides for the authorization and issuance of 4,000,000 shares, along with any residual shares from previous plans. Under the 2009 Plan, the exercise price of each option shall not be less than 100% of the fair market value of the stock on the date the options are granted. Generally, options expire ten years from the date granted and vest over a three-year graded vesting period for officers and employees and a one-year or less period for non-employee directors. Stock grants generally vest over a three-year cliff vesting period. As of December 31, 2013 the maximum number of shares of stock reserved and available for issuance under the Plan was 2,729,136 shares.

In 2010, the Company adopted the Boston Private Financial Holdings, Inc. 2010 Inducement Stock Plan (the “Inducement Plan”) for the purposes of granting equity awards to new employees as an inducement to join the Company. The Company reserved 600,000 shares of the Company’s common stock for issuance under the Inducement Plan. The terms of the Inducement Plan are substantially similar to the terms of the 2009 Plan. During 2011, the Company issued no shares under this Plan. During 2012, the Company issued an additional 7,246 shares under this plan in conjunction with an executive attaining certain performance metrics for previously-awarded shares. During 2013, the Company issued an additional 30,887 shares under this plan in conjunction with an executive attaining certain performance metrics for previously-awarded shares. At December 31, 2013, the Inducement Plan had 84,701 shares reserved and available for issuance.

The Company maintains both a qualified and non-qualified Employee Stock Purchase Plan (“the ESPPs”) with similar provisions. The non-qualified plan was approved in 2006 and allows for employees of certain subsidiaries that are structured as limited liability companies to participate; however, the Company suspended offering shares under the non-qualified plan during 2010. Under the ESPPs, eligible employees may purchase common stock of the Company at 85 percent of the lower of the closing price of the Company’s common stock on the first or last day of a six month purchase period on The NASDAQ® Global Select Market. Employees pay for their stock purchases through payroll deductions at a rate equal to any whole percentage from 1 percent to 15 percent of after-tax earnings. Participants have a right to a full reimbursement of ESPP deferrals through the end of the offering period. Such a reimbursement would result in a reversal of the compensation expense previously recorded, attributed to that participant. The Company issues shares under the ESPPs in January and July of each year. As of December 31, 2013, there were 208,327 and 10,508 shares shares available for issuance in the qualified and non-qualified ESPPs, respectively. There were 156,982 shares issued to participants under the qualified ESPP in 2013. There were no shares issued to participants under the non-qualified ESPP in 2013. The non-qualified ESPP plan was terminated in January 2014.

Share-based payments recorded in salaries and benefits expense are as follows:



	Year Ended December 31,
	2013		2012		2011
	(In thousands)
Stock option and ESPP expense	$	987	$	1,403	$	1,682
Nonvested share expense	4,747		6,669		5,083
Subtotal	5,734		8,072		6,765
Tax benefit	2,210		3,129		2,621
Stock-based compensation expense, net of tax benefit	$	3,524	$	4,943	$	4,144

The fair value of each stock option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the table below. Expected volatility is determined based on historical volatility of the Company’s stock, historical volatility of industry peers, and other factors. The Company uses historical data to estimate employee option exercise behavior and post-vesting cancellation for use in determining the expected life assumption. The risk-free rate is determined on the grant date of each award using the yield on a U.S. Treasury zero-coupon issue with a remaining term that approximates the expected term for the award. The dividend yield is based on expectations of future dividends paid by the Company and the market price of the Company’s stock on the date of grant. Compensation expense is recognized using the straight-line method over the vesting period of the option or the retirement eligible date, whichever is shorter. Options issued to retirement eligible employees are expensed on the date of grant.

The following table presents the weighted average assumptions used to determine the fair value of each option grant on the date of grant using the Black-Scholes option-pricing model in the years indicated:



	Year Ended December 31,
	2013 (1)		2012		2011
Expected volatility	—	%	66.9	%	63.5	%
Expected dividend yield	—	%	0.4	%	0.6	%
Expected term (in years)	—		6.2		6.3
Risk-free rate	—	%	1.0	%	2.3	%

__________


(1)	No options were issued in 2013.

Stock Options

A summary of option activity under the 2009 Plan for the year ended December 31, 2013 is as follows:



	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term in Years	Aggregate Intrinsic Value (in 000’s)
Outstanding at December 31, 2012	3,174,582	$	17.27
Granted	—	$	—
Exercised	327,913	$	7.49
Forfeited	137,910	$	17.22
Expired	498,114	$	22.03
Outstanding at December 31, 2013	2,210,645	$	17.65	3.70	$	5,331.1
Exercisable at December 31, 2013	2,042,446	$	18.46	3.36	$	4,524.4

The weighted-average grant-date fair value of options granted during the years ended December 31, 2012, and 2011 was $5.30, and $3.72, respectively. The total intrinsic value of options exercised during the years ended December 31, 2013, 2012, and 2011 was $0.8 million, $0.2 million, and $0.1 million, respectively. As of December 31, 2013, there was $0.4 million of total unrecognized compensation cost related to stock option arrangements granted under the 2009 Plan that is expected to be recognized over a weighted-average period of 1.1 years.

Restricted Stock

A summary of the Company’s nonvested shares as of December 31, 2013 and changes during the year ended December 31, 2013, including shares under both the 2009 Plan and the Inducement Plan, is as follows:



	Shares	Weighted- Average Grant-Date Fair Value
Nonvested at December 31, 2012	2,264,433	$	7.39
Granted	677,620	$	9.79
Vested	812,290	$	7.48
Forfeited	54,812	$	8.33
Nonvested at December 31, 2013	2,074,951	$	8.03

The fair value of nonvested shares is determined based on the closing price of the Company’s stock on the grant date. The weighted-average grant-date fair value of shares granted during the years ended December 31, 2013, 2012, and 2011 was $9.79, $8.93, and $6.44, respectively. At December 31, 2013, there was $7.4 million of total unrecognized compensation cost related to nonvested share-based compensation arrangements under the 2009 Plan and the Inducement Plan, combined. That cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of shares that vested during the years ended December 31, 2013, 2012, and 2011 was $6.1 million, $4.3 million, and $2.5 million, respectively.

Included in the restricted stock balances above are performance shares, which are granted to certain employees within the Company and are accounted for in the same manner as restricted stock. At December 31, 2013, there were 856,459 performance shares outstanding, including incentive shares issued to the CEO at his date of hire in July 2010. After the January 2014 vest, there were 547,680 performance shares outstanding, which could increase up to 985,824 shares. If the maximum number of performance shares is issued, the Company would incur an additional $4.2 million of compensation costs related to these additional 438,144 shares. The Company recognizes the expense for performance shares based upon the most likely outcome of shares to be issued based on current information.

Supplemental Executive Retirement Plans

The Company has a non-qualified supplemental executive retirement plan (“SERP”) with a former executive officer of the Company. The SERP, which is unfunded, provides a defined cash benefit based on a formula using average compensation, years of service, and age at retirement of the executive. The agreement was amended in July 2004 and then revised in February of 2007. Expected benefits were increased and the full vesting age was increased to age 70. During 2010, the executive officer retired, and the full vesting was accelerated to the actual retirement date by the Company. The estimated actuarial present value of the projected benefit obligation was $8.1 million and $8.8 million at December 31, 2013 and 2012, respectively. The expense associated with the SERP was $1.4 million, $0.5 million, and $0.9 million for the years ended December 31, 2013, 2012, and 2011, respectively. The discount rate used to calculate the SERP liability was 4.65%, 3.90%, and 4.55% for the years ended December 31, 2013, 2012, and 2011, respectively.

The Bank has a SERP with various current and former executives of the Pacific Northwest market. The SERP, which is unfunded, provides a defined cash benefit based on a formula using compensation, years of service, and age at retirement of the executives. The benefits for each executive under the plan are accrued until the full vesting age of 65. The actuarial present value of the projected benefit obligation was $2.7 million and $3.4 million at December 31, 2013 and 2012, respectively. The expense associated with the SERP was $0.1 million, $0.4 million, and $0.4 million for the years ended December 31, 2013, 2012, and 2011, respectively. The discount rate used to calculate the SERP liability was 4.25%, 3.95%, and 4.95%, for the years ended December 31, 2013, 2012, and 2011, respectively.

In 2011, the Bank entered into a settlement agreement with two former executives of the Pacific Northwest market. Per this settlement agreement, the former executives agreed to a one-time cash payment in exchange for their release of all claims under, and the termination of, the SERP and for other mutual releases. The Bank incurred an additional one-time expense related to these settlement agreements of $1.2 million in 2011. This settlement reduced the amount the Bank would need to expense in future years for the SERP.

KLS has a long term incentive plan (“LTIP”) with certain of its managing directors. This LTIP, which is unfunded, provides for a profit sharing based on current year results as well as a cash benefit at the time of separation of service. The cash payment at separation of service, which is determined based on the profit share and a multiple based on years of service, is payable in three equal annual installments following separation of service. The Company has accrued $5.5 million and $3.8 million at December 31, 2013 and 2012, respectively, for future separation of service payments. The LTIP was effective beginning January 1, 2010. The expense associated with the LTIP was $1.7 million, $1.6 million, and $1.2 million for the years ended December 31, 2013, 2012, and 2011, respectively.