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, 2018 and December 31, 2017, aggregated by the level in the fair value hierarchy within which those measurements fall:



	As of June 30, 2018		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	$	33,700	$	33,570	$	130	$	—
Government-sponsored entities	269,604		—		269,604		—
Municipal bonds	295,189		—		295,189		—
Mortgage-backed securities	470,532		—		470,532		—
Other	7,942		7,942		—		—
Total available-for-sale securities	1,076,967		41,512		1,035,455		—
Derivatives - interest rate customer swaps	26,865		—		26,865		—
Derivatives - interest rate swaps	1,197		—		1,197		—
Derivatives - risk participation agreement	24		—		24		—
Derivatives - customer foreign exchange forwards	1		—		1		—
Trading securities held in a “rabbi trust”	7,392		7,392		—		—

Liabilities:
Derivatives - interest rate customer swaps	$	27,290	$	—	$	27,290	$	—
Derivatives - risk participation agreement	113		—		113		—
Derivatives - customer foreign exchange forwards	1		—		1		—
Deferred compensation “rabbi trust”	7,392		7,392		—		—



			Fair value measurements at reporting date using:
	As of December 31, 2017		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	$	34,299	$	34,096	$	203	$	—
Government-sponsored entities	302,501		—		302,501		—
Municipal bonds	303,058		—		303,058		—
Mortgage-backed securities	509,676		—		509,676		—
Other	20,794		20,794		—		—
Total available-for-sale securities	1,170,328		54,890		1,115,438		—
Derivatives - interest rate customer swaps	18,575		—		18,575		—
Derivatives - interest rate swaps	555		—		555		—
Derivatives - risk participation agreements	1		—		1		—
Derivatives - customer foreign exchange forwards	2		—		2		—
Trading securities held in a rabbi trust	7,062		7,062		—		—

Liabilities:
Derivatives - interest rate customer swaps	$	18,953	$	—	$	18,953	$	—
Derivatives - interest rate swaps	80		—		80		—
Derivatives - risk participation agreements	108		—		108		—
Derivatives - customer foreign exchange forwards	2		—		2		—
Deferred compensation rabbi trust	7,062		7,062		—		—

As of June 30, 2018 and December 31, 2017, available-for-sale securities consisted of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, mortgage-backed securities, and other available-for-sale securities. Available-for-sale Level 1 securities are valued with prices quoted in active markets and include U.S. Treasury securities (which are categorized as U.S. government and agencies securities) and equities (which are categorized as other available-for-sale securities). Available-for-sale Level 2 securities generally have quoted prices but are traded less frequently than exchange-traded securities and can be priced using market data from similar assets and include government-sponsored entities securities, municipal bonds, mortgage-backed securities, and certain investments in SBA loans (which are categorized as U.S. government and agencies securities). No investments held as of June 30, 2018 or December 31, 2017 were categorized as Level 3. There were no changes in the valuation techniques used for measuring the fair value of available-for-sale securities in the six months ended June 30, 2018.

In managing its interest rate and credit risk, the Company utilizes derivative instruments including interest rate customer swaps, interest rate swaps, and risk participation agreements. As a service to its customers, the Company may utilize derivative instruments including 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, and therefore, they have been categorized as a Level 2 measurement as of June 30, 2018 and December 31, 2017. 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 has determined that the majority of inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. 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 June 30, 2018 and December 31, 2017.

Trading securities held in a rabbi trust 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 June 30, 2018 and December 31, 2017.

The Company accounts for its investments held in the rabbi trust in accordance with ASC 320, Investments - Debt and Equity Securities. The investments held in the rabbi trust are classified as trading securities. The assets of the rabbi trust are carried at their fair value within Other assets on the consolidated balance sheet. Changes in the fair value of the securities are recorded as an increase or decrease in Other income each quarter. The deferred compensation accrual reflects the market value of the securities and is included within Other liabilities on the consolidated balance sheet. Changes in the fair value of the accrual are recorded as an increase or decrease in Other expense each quarter.

There were no transfers between levels for assets or liabilities recorded at fair value on a recurring basis during the three and six months ended June 30, 2018 and 2017.

There were no Level 3 assets valued on a recurring basis at June 30, 2018 or December 31, 2017.

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended June 30, 2018 and 2017, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall.



	As of June 30, 2018		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of June 30, 2018		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended June 30, 2018			Six months ended June 30, 2018
	(In thousands)
Assets:
Impaired loans (1)	$	3,051	$	—	$	—	$	3,051	$	(711	)	$	(927	)

_____________________


(1)	Collateral-dependent impaired loans held at June 30, 2018 that had write-downs in fair value or whose specific reserve changed during the first six months of 2018.



	As of June 30, 2017		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
	As of June 30, 2017		Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended June 30, 2017			Six months ended June 30, 2017
	(In thousands)
Assets:
Impaired loans (1)	$	1,040	$	—	$	—	$	1,040	$	(221	)	$	(219	)

_____________________


(1)	Collateral-dependent impaired loans held at June 30, 2017 that had write-downs in fair value or whose specific reserve changed during the first six months of 2017.

The following tables present 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 June 30, 2018
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	3,051	Appraisals of Collateral	Discount for costs to sell	0% - 24%	9%
Impaired Loans	$	3,051	Appraisals of Collateral	Appraisal adjustments	0% - 20%	7%



	As of June 30, 2017
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	1,040	Appraisals of Collateral	Discount for costs to sell	0% - 7%	6%
Impaired Loans	$	1,040	Appraisals of Collateral	Appraisal adjustments	0% - 20%	16%

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:



	As of June 30, 2018
	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	$	364,539	$	364,539	$	364,539	$	—	$	—
Investment securities held-to-maturity	78,955		76,747		11,904		64,843		—
Loans held for sale	4,622		4,691		—		4,691		—
Loans, net	6,693,659		6,680,524		—		—		6,680,524
Other financial assets	104,264		104,264		—		104,264		—
FINANCIAL LIABILITIES:
Deposits	6,620,179		6,617,149		—		6,617,149		—
Securities sold under agreements to repurchase	58,824		58,824		—		58,824		—
Federal Home Loan Bank borrowings	1,056,938		1,053,066		—		1,053,066		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	3,465		3,465		—		3,465		—



	As of December 31, 2017
	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	$	120,541	$	120,541	$	120,541	$	—	$	—
Investment securities held-to-maturity	74,576		73,781		—		73,781		—
Loans held for sale	4,697		4,737		—		4,737		—
Loans, net	6,430,286		6,388,297		—		—		6,388,297
Other financial assets	93,449		93,449		—		93,449		—
FINANCIAL LIABILITIES:
Deposits	6,510,246		6,509,197		—		6,509,197		—
Securities sold under agreements to repurchase	32,169		32,169		—		32,169		—
Federal funds purchased	30,000		30,000		—		30,000		—
Federal Home Loan Bank borrowings	693,681		692,402		—		692,402		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	2,224		2,224		—		2,224		—

The estimated fair values have been determined by using available quoted market information or other appropriate valuation methodologies. The aggregate fair value amounts presented above do not represent the underlying value of the financial assets and liabilities of the Company taken as a whole as they do not reflect any premium or discount the Company might recognize if the assets were sold or the liabilities sold, settled, or redeemed. An excess of fair value over book value on financial assets represents a premium, or gain, the Company might recognize if the assets were sold, while an excess of book value over fair value on financial liabilities represents a premium, or gain, the Company might recognize if the liabilities were sold, settled, or redeemed prior to maturity. Conversely, losses would be recognized if assets were sold where the book value exceeded the fair value or liabilities were sold where the fair value exceeded the book value.

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 are considered best estimates. Changes made to any of the underlying assumptions could significantly affect the estimates.

Cash and cash equivalents

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

Held-to-maturity investment securities

Held-to-maturity securities currently include mortgage-backed securities and U.S. Treasury securities. The U.S Treasury securities as of June 30, 2018 are valued with prices quoted in active markets. Therefore, they have been categorized as a Level 1 measurement. There were no U.S. Treasury securities held-to-maturity as of December 31, 2017. The mortgage-backed 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 is 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, held-to-maturity mortgage-backed securities are included in the Level 2 fair value category.

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. Accordingly, loans held for sale are included in the Level 2 fair value category.

Loans, net

Fair value estimates are based on loans with similar financial characteristics. Following the adoption of ASU 2016-01 in 2018, the Company updated its process for estimating the fair value of loans, net of allowance for loan losses. The updated process estimates the fair value of loans using the exit price notion, which includes identifying an exit price using current market information for origination rates and making certain adjustments to incorporate credit risk, transaction costs and other adjustments utilizing publicly available rates and indicies. Net loans are included in the Level 3 fair value category based upon the inputs and valuation techniques used. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” for additional information on ASU 2016-01.

Other financial assets

Other financial assets consist of accrued interest and fees receivable, and stock in the Federal Home Loan Bank of Boston (“FHLB”) and the Federal Reserve Bank (“FRB”), 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 sheet 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 is 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 funds purchased

The carrying amounts of federal funds purchased, if any, approximate fair value due to their short-term nature and therefore these funds 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 therefore these borrowings have been classified as Level 2.

Junior subordinated debentures

The fair value of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II 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 regulatory changes that would result in an unfavorable change in the regulatory capital treatment of this type of debt.

Other financial liabilities

Other financial liabilities consists of accrued interest payable for which the carrying amount approximates fair value and is 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.