FAIR VALUE OF FINANCIAL INSTRUMENTS

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 December 31, 2013 and 2012, aggregated by the level in the fair value hierarchy within which those measurements fall:



	As of December 31, 2013		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:
Derivative-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 December 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	$	2,753	$	—	$	2,753	$	—
Government-sponsored entities	155,002		—		155,002		—
Municipal bonds	210,984		—		210,984		—
Mortgage-backed securities	317,927		—		317,927		—
Other	12,634		12,634		—		—
Total available for sale securities	699,300		12,634		686,666		—
Derivatives - interest rate customer swaps	2,915		—		2,915		—
Derivatives - customer foreign exchange forward	120		—		120		—
Other investments	5,892		5,206		686		—
Liabilities:
Derivatives - interest rate customer swaps	$	3,047	$	—	$	3,047	$	—
Derivatives - customer foreign exchange forward	120		—		120		—
Derivatives-junior subordinated debenture interest rate swap	5,189		—		5,189		—

As of December 31, 2013 and 2012, available for sale securities consisted primarily of U.S. government and agency securities, government-sponsored entities securities, municipal bonds, mortgage-backed securities, and other available for sale securities. The equities (which are categorized as other available for sale securities) are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. The government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in Small Business Administration (“SBA”) loans (which are categorized as U.S. government and agencies securities) generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets. Therefore, they have been categorized as a Level 2 measurement. No investments held at December 31, 2013 and 2012 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 December 31, 2013 and 2012. See Part I. Item 1. “Notes to Consolidated Financial Statements-Note 9: 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 December 31, 2013 and 2012.

Other investments, which are not considered available for sale investments, consist of deferred compensation trusts for the benefit of certain current or former employees, which consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement as of December 31, 2013 and 2012. The remaining other investments categorized as Level 2 consist of the Company’s cost-method investments as of December 31, 2013 and 2012.

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

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



	As of December 31, 2013		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	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)		Year ended December 31, 2013
	(In thousands)
Assets:
Impaired loans (1)	$	8,734	$	—	$	—	$	8,734	$	(2,464	)
	$	8,734	$	—	$	—	$	8,734	$	(2,464	)

___________________


(1)	Collateral-dependent impaired loans held at December 31, 2013 that had write-downs in fair value or whose specific reserve changed during 2013.



	As of December 31, 2012		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of December 31, 2012		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Year ended December 31, 2012
	(In thousands)
Assets:
Impaired loans (1)	$	16,797	$	—	$	—	$	16,797	$	(7,173	)
OREO (2)	379		—		—		379		(102		)
	$	17,176	$	—	$	—	$	17,176	$	(7,275	)

___________________


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


(2)	One OREO property held at December 31, 2012 had a write-down during 2012.

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



	As of December 31, 2013
	Fair Value		Valuation technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	8,734	Appraisals of Collateral	Discount for costs to sell	0% - 13%	8%
Impaired Loans	$	8,734	Appraisals of Collateral	Appraisal adjustments	0% - 45%	27%



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

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 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		—



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

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

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

Cash and cash equivalents

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

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

Other financial assets

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

Deposits

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

Deposits held for sale

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

Securities sold under agreements to repurchase

The fair value of securities sold under agreements to repurchase are estimated based on contractual cash flows discounted at the Bank’s incremental borrowing rate for FHLB borrowings with similar maturities and have been classified as Level 2.

Federal 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

At December 31, 2012, the fair value of the junior subordinated debentures acquired in the acquisitions of FPB, Gibraltar, and Charter 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 pending regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt. During 2013, the Company redeemed these junior subordinated debentures.

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust II was also estimated using the same Level 3 inputs as discussed in the preceding paragraph at December 31, 2013 and 2012.

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I was estimated based on the current market price of the securities as of December 31, 2012 and therefore was classified as Level 2. However, at December 31, 2013, there were no recent sales of these securities to use in estimating the fair value based on Level 2 inputs. Therefore, at December 31, 2013, these securities were valued with Level 3 inputs, as discussed in the preceding paragraphs.

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.