EMPLOYEE BENEFITS

Employee 401(k) Profit Sharing Plan

The Company established a corporate-wide 401(k) Profit Sharing Plan (the “401(k) Plan”) for the benefit of the employees of the Company and its affiliates, which became effective on July 1, 2002. The 401(k) 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. 401(k) Plan expense was $3.0 million, $2.8 million, and $2.4 million, in the years ended December 31, 2016, 2015, and 2014, respectively.

Salary Continuation Plans

The Bank maintains a salary continuation plan for certain former officers in the Bank’s San Francisco Bay Area market. The officers became eligible for benefits under the salary continuation plan if they reached a defined retirement age while working for the Bank. The Bank also has a deferred compensation plan for certain former directors of the former private banking affiliate in the San Francisco Bay Area that was merged into the Bank. The compensation expense relating to each contract is accounted for individually. The expense relating to these plans was $0.1 million for each of the years ended December 31, 2016, 2015, and 2014. The amount recognized in other liabilities in the consolidated balance sheets was $1.1 million and $1.3 million at December 31, 2016 and 2015, 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 $6.3 million and $6.2 million, which are included in other assets in the consolidated balance sheets, as of December 31, 2016 and 2015, respectively.

The Bank also maintains a salary continuation plan for certain former officers of the Bank’s Southern California market. The plan provides for payments to the participants at the age of retirement. The expense relating to these plans was $0.1 million, $0.1 million, and $0.2 million for the years ended December 31, 2016, 2015, and 2014, respectively. The net amount recognized in other liabilities in the consolidated balance sheets was $1.9 million and $2.0 million at December 31, 2016 and 2015, respectively. The Bank has purchased life insurance contracts to help fund these plans. These life insurance policies have cash surrender values totaling $4.8 million and $4.7 million at December 31, 2016 and 2015, respectively, which are included in other assets in the consolidated balance sheets.

Deferred Compensation Plan

The Company offers a deferred compensation plan (the “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 net deferred amount related to the Deferred Compensation Plan in other liabilities in the consolidated balance sheets was $6.1 million and $5.6 million at December 31, 2016 and 2015, respectively. Increases and decreases in the value of the Deferred Compensation Plan are recognized as compensation expense in the consolidated statements of operations. The expense relating to the Deferred Compensation Plan was expense of $0.6 million, an expense credit of $0.1 million, and expense of $0.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.

The Company has adopted a special trust for the Deferred Compensation Plan called a Rabbi Trust. A Rabbi Trust is an arrangement that is used to accumulate assets that may be used to “fund” the Company’s obligation to pay benefits under the Deferred Compensation Plan. However, to prevent immediate taxation to the executives who participate in the Deferred Compensation Plan, the amounts placed in the Rabbi Trust must remain subject to the claims of the Company’s creditors. The investments chosen by the participants in the Deferred Compensation Plan are mirrored by the Rabbi Trust as a way to minimize the earnings volatility of the Deferred Compensation Plan. The net amount recognized in other assets in the consolidated balance sheets was $6.1 million and $5.6 million at December 31, 2016 and 2015, respectively. Increases and decreases in the value of the Rabbi Trust are recognized in other income in the consolidated statement of operations. The income relating to this plan was a gain of $0.6 million, a loss of $0.1 million, and a gain of $0.6 million for the years ended December 31, 2016, 2015, and 2014, respectively.

Stock-Based Incentive Plans

At December 31, 2016, the Company has three 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, 2016 the maximum number of shares of stock reserved and available for issuance under the Plan was 2,700,968 shares.

Under the Boston Private Financial Holdings, Inc. 2010 Inducement Stock Plan (the “Inducement Plan”), the Company may grant equity awards to new employees as an inducement to join the Company. The Company reserved 1,245,000 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. In 2014, the Company issued an additional 637,804 shares under this plan in conjunction with the Bank’s acquisition of Banyan. In 2015, the Company issued an additional 22,936 shares under this plan in conjunction with an executive new hire. In 2016, the Company issued 37,177 shares under this plan in conjunction with executive new hires. At December 31, 2016, the Inducement Plan had 148,854 shares reserved and available for issuance.

The Company maintains a qualified Employee Stock Purchase Plan (“ESPP”). Under the ESPP, 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 ESPP in January and July of each year. As of December 31, 2016, there were 777,726 shares available for issuance in the ESPP. There were 165,919 shares issued to participants under the qualified ESPP in 2016.

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



	Year Ended December 31,
	2016		2015		2014
	(In thousands)
Stock option and ESPP expense	$	437	$	518	$	653
Nonvested share expense	6,293		5,723		5,339
Subtotal	6,730		6,241		5,992
Tax benefit	2,574		2,367		2,311
Stock-based compensation expense, net of tax benefit	$	4,156	$	3,874	$	3,681

Stock Options

A summary of option activity under the 2009 Plan for the year ended December 31, 2016 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, 2015	1,222,951	$	16.27
Granted	—	$	—
Exercised	244,567	$	7.60
Forfeited	73,062	$	29.49
Expired	248,922	$	29.25
Outstanding at December 31, 2016	656,400	$	13.11	2.26 years	$	4,117.0
Exercisable at December 31, 2016	656,400	$	13.11	2.26 years	$	4,117.0

The total intrinsic value of options exercised during the years ended December 31, 2016, 2015, and 2014 was $1.5 million, $0.7 million, and $1.1 million, respectively. As of December 31, 2016, there was no unrecognized compensation cost related to stock option arrangements granted under the 2009 Plan.

Restricted Stock

A summary of the Company’s nonvested shares as of December 31, 2016 and changes during the year ended December 31, 2016, 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, 2015	2,236,383	$	11.72
Granted	599,673	$	11.58
Vested	490,658	$	10.90
Forfeited	351,770	$	10.18
Nonvested at December 31, 2016	1,993,628	$	12.16

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, 2016, 2015, and 2014 was $11.58, $12.41, and $12.42, respectively. At December 31, 2016, there was $10.2 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 1.9 years. The total fair value of shares that vested during the years ended December 31, 2016, 2015, and 2014 was $5.3 million, $5.3 million, and $5.1 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, 2016, there were 831,726 performance shares outstanding, which could increase up to 1,497,107 shares. If the maximum number of performance shares is issued, the Company would incur an additional $8.1 million of compensation costs related to these additional 665,381 shares. The Company recognizes the expense for performance shares based upon the most likely outcome of shares to be issued based on current forecasts.

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 estimated actuarial present value of the projected benefit obligation was $8.2 million and $8.3 million at December 31, 2016 and 2015, respectively. The expense associated with the SERP was $0.5 million, $0.5 million, and $1.0 million for the years ended December 31, 2016, 2015, and 2014, respectively. The discount rate used to calculate the SERP liability was 4.10%, 4.35%, and 3.85% for the years ended December 31, 2016, 2015, and 2014, respectively.

The Bank has a SERP with various 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 $3.2 million at both December 31, 2016 and 2015. The expense associated with the SERP was $0.2 million for each of the years ended December 31, 2016, 2015, and 2014. The discount rate used to calculate the SERP liability was 3.62%, 3.81%, and 3.45%, for the years ended December 31, 2016, 2015, and 2014, respectively.

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 $7.6 million and $7.9 million at December 31, 2016 and 2015, respectively, for future separation of service payments. The LTIP was effective beginning January 1, 2010. The expense associated with the LTIP was $(0.2) million, $1.3 million, and $1.9 million for the years ended December 31, 2016, 2015, and 2014, respectively. The discount rate used to calculate the SERP liability was 3.70%, 3.90%, and 3.80% for the years ended December 31, 2016, 2015, and 2014, respectively.