UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

Or

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-35070

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

Commonwealth of Massachusetts	04-2976299
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)
Ten Post Office Square Boston, Massachusetts	02109
(Address of principal executive offices)	(Zip Code)
Registrant’s telephone number, including area code: (617) 912-1900

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x		Accelerated filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company o
		Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No x

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of November 2, 2018:

Common Stock, Par Value $1.00 Per Share	84,377,380
(class)	(outstanding)

BOSTON PRIVATE FINANCIAL HOLDINGS, INC.

FORM 10-Q

TABLE OF CONTENTS

PART I—FINANCIAL INFORMATION
Item 1	Financial Statements (Unaudited)	1
	Consolidated Balance Sheets	1
	Consolidated Statements of Operations	2
	Consolidated Statements of Comprehensive Income	4
	Consolidated Statements of Changes in Shareholders’ Equity	5
	Consolidated Statements of Cash Flows	6
	Notes to Unaudited Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	52
	Executive Summary	53
	Critical Accounting Policies	54
	Results of Operations	55
	Financial Condition	63
	Condensed Consolidated Balance Sheets and Discussion	63
	Loan Portfolio and Credit Quality	66
	Liquidity	71
	Capital Resources	74
	Recent Accounting Pronouncements	76
Item 3	Quantitative and Qualitative Disclosures about Market Risk	76
Item 4	Controls and Procedures	76
PART II—OTHER INFORMATION
Item 1	Legal Proceedings	77
Item 1A	Risk Factors	77
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	77
Item 3	Defaults upon Senior Securities	77
Item 4	Mine Safety Disclosures	77
Item 5	Other Information	77
Item 6	Exhibits	78
	Signature Page	79
	Certifications

i

PART I. FINANCIAL INFORMATION, ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Unaudited)
	September 30, 2018			December 31, 2017
	(In thousands, except share  and per share data)
Assets:
Cash and cash equivalents	$	92,634		$	120,541
Investment securities available-for-sale (amortized cost of $1,101,756 and $1,182,427 at September 30, 2018 and December 31, 2017, respectively)	1,063,340			1,170,328
Investment securities held-to-maturity (fair value of$72,927 and $73,781 at September 30, 2018 and December 31, 2017, respectively)	75,468			74,576
Stock in Federal Home Loan Bank and Federal Reserve Bank	48,727			59,973
Loans held for sale	3,344			4,697
Total loans	6,720,420			6,505,028
Less: Allowance for loan losses	73,500			74,742
Net loans	6,646,920			6,430,286
Other real estate owned (“OREO”)	108			—
Premises and equipment, net	47,399			37,640
Goodwill	75,598			75,598
Intangible assets, net	13,834			16,083
Fees receivable	10,445			11,154
Accrued interest receivable	24,641			22,322
Deferred income taxes, net	27,833			29,031
Other assets	245,549			259,515
Total assets	$	8,375,840		$	8,311,744
Liabilities:
Deposits	$	6,768,723		$	6,510,246
Securities sold under agreements to repurchase	39,453			32,169
Federal funds purchased	120,000			30,000
Federal Home Loan Bank borrowings	441,836			693,681
Junior subordinated debentures	106,363			106,363
Other liabilities	149,770			135,880
Total liabilities	7,626,145			7,508,339
Redeemable Noncontrolling Interests	11,686			17,461
Shareholders’ Equity:
Preferred stock, $1.00 par value; authorized: 2,000,000 shares; Series D, 6.95% Non-Cumulative Perpetual, issued and outstanding: zero shares at September 30, 2018 and 50,000 shares at December 31, 2017; liquidation preference: $1,000 per share	—			47,753
Common stock, $1.00 par value; authorized: 170,000,000 shares; issued and outstanding: 84,602,519 shares at September 30, 2018 and 84,208,538 shares at December 31, 2017	84,603			84,208
Additional paid-in capital	614,157			607,929
Retained earnings	64,618			49,526
Accumulated other comprehensive income/ (loss)	(27,578		)	(8,658		)
Total Company’s shareholders’ equity	735,800			780,758
Noncontrolling interests	2,209			5,186
Total shareholders’ equity	738,009			785,944
Total liabilities, redeemable noncontrolling interests and shareholders’ equity	$	8,375,840		$	8,311,744

See accompanying notes to consolidated financial statements.

1

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In thousands, except share and per share data)
Interest and dividend income:
Loans	$	68,254		$	58,096		$	193,231		$	169,468
Taxable investment securities	1,510			1,569			4,521			4,831
Non-taxable investment securities	1,779			1,664			5,261			4,925
Mortgage-backed securities	2,941			3,267			9,168			10,266
Short-term investments and other	1,617			916			3,831			2,347
Total interest and dividend income	76,101			65,512			216,012			191,837
Interest expense:
Deposits	11,487			5,356			26,376			14,836
Federal Home Loan Bank borrowings	3,877			2,657			11,668			7,257
Junior subordinated debentures	1,028			761			2,882			2,148
Repurchase agreements and other short-term borrowings	68			111			517			182
Total interest expense	16,460			8,885			41,443			24,423
Net interest income	59,641			56,627			174,569			167,414
Provision/ (credit) for loan losses	(949		)	(432		)	(2,291		)	(6,727		)
Net interest income after provision/ (credit) for loan losses	60,590			57,059			176,860			174,141
Fees and other income:
Investment management fees	3,245			11,274			18,897			33,194
Wealth advisory fees	13,995			13,279			41,200			39,063
Wealth management and trust fees	11,510			11,619			34,830			33,606
Other banking fee income	2,775			2,726			7,793			6,384
Gain on sale of loans, net	67			169			204			366
Gain/ (loss) on sale of investments, net	—			230			(17		)	486
Gain/ (loss) on OREO, net	—			—			—			(46		)
Other	722			970			1,245			1,738
Total fees and other income	32,314			40,267			104,152			114,791
Operating expense:
Salaries and employee benefits	38,944			44,912			125,461			133,889
Occupancy and equipment	8,164			7,944			24,141			22,412
Professional services	2,877			3,308			8,926			9,728
Marketing and business development	1,710			2,216			5,373			5,847
Information systems	6,233			5,282			18,889			16,161
Amortization of intangibles	750			1,426			2,249			4,278
FDIC insurance	674			647			2,126			2,292
Restructuring	5,763			—			5,763			—
Other	3,442			3,611			10,870			11,340
Total operating expense	68,557			69,346			203,798			205,947
Income before income taxes	24,347			27,980			77,214			82,985
Income tax expense	5,461			8,289			28,886			24,805
Net income from continuing operations	18,886			19,691			48,328			58,180
Net income from discontinued operations	—			1,186			1,696			3,881
Net income before attribution to noncontrolling interests	18,886			20,877			50,024			62,061
(Continued)

2

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Less: Net income attributable to noncontrolling interests	924			1,074			2,942			3,190
Net income attributable to the Company	$	17,962		$	19,803		$	47,082		$	58,871
Adjustments to net income attributable to the Company to arrive at net income attributable to common shareholders	$	(829	)	$	(1,146	)	$	(4,376	)	$	(2,889	)
Net income attributable to common shareholders for earnings per share calculation	$	17,133		$	18,657		$	42,706		$	55,982
Basic earnings per share attributable to common shareholders:
From continuing operations:	$	0.20		$	0.21		$	0.49		$	0.63
From discontinued operations:	$	—		$	0.01		$	0.02		$	0.05
Total attributable to common shareholders:	$	0.20		$	0.23		$	0.51		$	0.68
Weighted average basic common shares outstanding	84,017,284			82,556,225			83,544,754			82,270,849
Diluted earnings per share attributable to common shareholders:
From continuing operations:	$	0.20		$	0.21		$	0.48		$	0.61
From discontinued operations:	$	—		$	0.01		$	0.02		$	0.05
Total attributable to common shareholders:	$	0.20		$	0.22		$	0.50		$	0.66
Weighted average diluted common shares outstanding	85,498,568			84,888,311			85,254,295			84,741,172

See accompanying notes to consolidated financial statements.

3

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited)
	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In thousands)
Net income attributable to the Company	$	17,962		$	19,803		$	47,082		$	58,871
Other comprehensive income/ (loss), net of tax:
Unrealized gain/ (loss) on securities available-for-sale	(4,040		)	1,114			(18,888		)	7,588
Reclassification adjustment for net realized (gain)/ loss included in net income	—			(141		)	—			(293		)
Net unrealized gain/ (loss) on securities available-for-sale	(4,040		)	973			(18,888		)	7,295
Unrealized gain/ (loss) on cash flow hedges	(138		)	70			574			(140		)
Reclassification adjustment for net realized (gain)/ loss included in net income	(72		)	172			(273		)	558
Net unrealized gain/ (loss) on cash flow hedges	(210		)	242			301			418
Net unrealized gain/ (loss) on other	—			—			1			12
Other comprehensive income/ (loss), net of tax	(4,250		)	1,215			(18,586		)	7,725
Total comprehensive income attributable to the Company, net	$	13,712		$	21,018		$	28,496		$	66,596

See accompanying notes to consolidated financial statements.

4

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (Unaudited)
	Preferred Stock			Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income/ (Loss)			Non- controlling Interests			Total
	(In thousands, except share data)
Balance, December 31, 2016	$	47,753		$	83,732		$	597,454		$	47,929		$	(12,548	)	$	4,161		$	768,481
Net income attributable to the Company	—			—			—			58,871			—			—			58,871
Other comprehensive income/ (loss), net	—			—			—			—			7,725			—			7,725
Dividends paid to common shareholders: $0.33 per share	—			—			—			(27,739		)	—			—			(27,739		)
Dividends paid to preferred shareholders	—			—			—			(2,606		)	—			—			(2,606		)
Net change in noncontrolling interests	—			—			—			—			—			631			631
Net proceeds from issuance of:
140,284 shares of common stock	—			140			1,461			—			—			—			1,601
90,848 incentive stock grant shares canceled or forfeited and 62,087 shares withheld for employee taxes	—			(153		)	(816		)	—			—			—			(969		)
Exercise of warrants	—			261			1,618			—			—			—			1,879
Amortization of stock compensation and employee stock purchase plan	—			—			6,183			—			—			—			6,183
Stock options exercised	—			102			725			—			—			—			827
Other equity adjustments	—			—			177			—			—			—			177
Balance at September 30, 2017	$	47,753		$	84,082		$	606,802		$	76,455		$	(4,823	)	$	4,792		$	815,061
Balance, December 31, 2017	$	47,753		$	84,208		$	607,929		$	49,526		$	(8,658	)	$	5,186		$	785,944
Reclassification due to change in accounting principles	—			—			—			334			(334		)	—			—
Net income attributable to the Company	—			—			—			47,082			—			—			47,082
Other comprehensive income/ (loss), net	—			—			—			—			(18,586		)	—			(18,586		)
Dividends paid to common shareholders: $0.36 per share	—			—			—			(30,586		)	—			—			(30,586		)
Dividends paid to preferred shareholders	—			—			—			(1,738		)	—			—			(1,738		)
Net change in noncontrolling interests	—			—			—			—			—			(2,977		)	(2,977		)
Redemption of Series D preferred stock	(47,753		)	—			(2,247		)	—			—			—			(50,000		)
Repurchase of 137,114 shares of common stock	—			(137		)	(1,768		)	—			—			—			(1,905		)
Net proceeds from issuance of:
142,738 shares of common stock	—			143			1,722			—			—			—			1,865
132,964 incentive stock grant shares canceled or forfeited and 127,894 shares withheld for employee taxes, net of 7,355 shares of incentive stock grants	—			(253		)	(1,699		)	—			—			—			(1,952		)
Exercise of warrants	—			438			(277		)	—			—			—			161
Amortization of stock compensation and employee stock purchase plan	—			—			5,131			—			—			—			5,131
Stock options exercised	—			204			1,457			—			—			—			1,661
Other equity adjustments	—			—			3,909			—			—			—			3,909
Balance at September 30, 2018	$	—		$	84,603		$	614,157		$	64,618		$	(27,578	)	$	2,209		$	738,009

See accompanying notes to consolidated financial statements.

5

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine months ended September 30,
	2018			2017
	(In thousands)
Cash flows from operating activities:
Net income attributable to the Company	$	47,082		$	58,871
Adjustments to arrive at net income from continuing operations
Net income attributable to noncontrolling interests	2,942			3,190
Less: Net income from discontinued operations	(1,696		)	(3,881		)
Net income from continuing operations	48,328			58,180
Adjustments to reconcile net income from continuing operations to net cash provided by/ (used in) operating activities:
Depreciation and amortization	17,192			15,835
Net income attributable to noncontrolling interests	(2,942		)	(3,190		)
Stock compensation, net of cancellations	5,232			6,183
Provision/ (credit) for loan losses	(2,291		)	(6,727		)
Loans originated for sale	(32,364		)	(38,099		)
Proceeds from sale of loans held for sale	33,935			39,972
Deferred income tax expense/ (benefit)	8,548			4,141
Net decrease/ (increase) in other operating activities	(14,348		)	(9,407		)
Net cash provided by/ (used in) operating activities of continuing operations	61,290			66,888
Net cash provided by/ (used in) operating activities of discontinued operations	1,696			3,881
Net cash provided by/ (used in) operating activities	62,986			70,769
Cash flows from investing activities:
Investment securities available-for-sale:
Purchases	(63,246		)	(138,623		)
Sales	51,781			119,238
Maturities, calls, redemptions, and principal payments	86,085			100,065
Investment securities held-to-maturity:
Purchases	(11,876		)	(14,945		)
Principal payments	10,726			23,541
(Investments)/ distributions in trusts, net	1,252			(747		)
Purchase of additional Bank Owned Life Insurance (“BOLI”)	—			(50,000		)
(Purchase)/ redemption of Federal Home Loan Bank and Federal Reserve Bank stock	11,246			(17,637		)
Net increase in portfolio loans	(217,317		)	(298,304		)
Proceeds from recoveries of loans previously charged-off	1,578			4,082
Proceeds from sale of OREO	—			1,644
Capital expenditures, net of sale proceeds	(18,349		)	(10,769		)
Proceeds from sale of affiliate	34,120			—
Net cash provided by/ (used in) investing activities	(114,000		)	(282,455		)
(Continued)

6

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
	Nine months ended September 30,
	2018			2017
Cash flows from financing activities:
Net increase/ (decrease) in deposits	258,477			177,201
Net increase/ (decrease) in securities sold under agreements to repurchase	7,284			279
Net increase/ (decrease) in federal funds purchased	90,000			(10,000		)
Net increase/ (decrease) in short-term Federal Home Loan Bank borrowings	(230,000		)	110,000
Advances of long-term Federal Home Loan Bank borrowings	91,444			50,110
Repayments of long-term Federal Home Loan Bank borrowings	(113,289		)	(81,542		)
Redemption of Series D preferred stock	(50,000		)	—
Dividends paid to common shareholders	(30,586		)	(27,739		)
Dividends paid to preferred shareholders	(1,738		)	(2,606		)
Proceeds from warrant exercises	161			1,879
Repurchase of common stock	(1,905		)	—
Proceeds from stock option exercises	1,661			827
Proceeds from issuance of common stock	1,865			1,601
Tax withholding for share based compensation awards	(2,053		)	(969		)
Distributions paid to noncontrolling interests	(2,848		)	(3,197		)
Other equity adjustments	4,634			(275		)
Net cash provided by/ (used in) financing activities	23,107			215,569
Net increase/ (decrease) in cash and cash equivalents	(27,907		)	3,883
Cash and cash equivalents at beginning of year	120,541			106,557
Cash and cash equivalents at end of period	$	92,634		$	110,440
Supplementary schedule of non-cash investing and financing activities:
Cash paid for interest	$	40,703		$	23,681
Cash paid for income taxes, (net of refunds received)	18,898			32,051
Change in unrealized gain/ (loss) on available-for-sale securities, net of tax	(18,888		)	7,295
Change in unrealized gain/ (loss) on cash flow hedges, net of tax	301			418
Change in unrealized gain/ (loss) on other, net of tax	1			12
Non-cash transactions:
Loans transferred into other real estate owned from loan portfolio	108			—
Loans charged-off	(529		)	(559		)

See accompanying notes to consolidated financial statements.

7

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements

1.     Basis of Presentation and Summary of Significant Accounting Policies

Boston Private Financial Holdings, Inc. (the “Company” or “BPFH”), is a bank holding company (the “Holding Company”) with four reportable segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory.

The Private Banking segment is comprised of the banking operations of Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”), a trust company chartered by The Commonwealth of Massachusetts whose deposits are insured by the Federal Deposit Insurance Corporation (the “FDIC”), and a wholly-owned subsidiary of the Company. Boston Private Bank is a member of the Federal Reserve Bank of Boston. Boston Private Bank primarily operates in three geographic markets: New England, the San Francisco Bay Area, and Southern California.

The Wealth Management and Trust segment is comprised of the operations of Boston Private Wealth LLC (“Boston Private Wealth”), a wholly-owned subsidiary of Boston Private Bank, and the trust operations of Boston Private Bank. The segment offers investment management, wealth management, retirement plan advisory, family office, financial planning, and trust services to individuals, families, and institutions. The Wealth Management and Trust segment operates in New England; South Florida; California; and Madison, Wisconsin.

The Investment Management segment had two consolidated affiliates, Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”) and Anchor Capital Advisors, LLC (“Anchor”) (together, the “Investment Managers”) included in its results for the first quarter of 2018. The assets and liabilities of Anchor were classified as held for sale as of March 31, 2018 and December 31, 2017. Assets held for sale were $58.8 million at December 31, 2017, and liabilities held for sale were $3.2 million at December 31, 2017. In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that would result in Anchor being majority-owned by members of its management team. The transaction closed in April 2018. The Investment Management segment results for the third quarter of 2018 include results from DGHM. The Investment Management segment results for the first nine months of 2018 include results from DGHM for the full period and results from Anchor for the portion of the period before the transaction was closed.

The Wealth Advisory segment has two consolidated affiliates, consisting of KLS Professional Advisors Group, LLC (“KLS”) and Bingham, Osborn & Scarborough, LLC (“BOS”) (together, the “Wealth Advisors” and, together with the Wealth Management and Trust, and Investment Management segments, the “Wealth and Investment businesses”). On October 17, 2018, the Company announced an agreement to sell its entire ownership interest in BOS in a transaction that will result in BOS being majority-owned by members of its management team. The transaction is expected to close in the fourth quarter of 2018. Completion of the transaction is subject to obtaining client consents, as well as satisfaction of other customary closing conditions. As a result, the assets and liabilities of BOS will be classified as held for sale from October 17, 2018 through the date the transaction closes. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 15: Subsequent Event” for further details.

The Company conducts substantially all of its business through its four reportable segments. All significant intercompany accounts and transactions have been eliminated in consolidation.

The unaudited interim consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”), and include all necessary adjustments of a normal recurring nature which, in the opinion of management, are required for a fair presentation of the results of operations and financial condition of the Company. The interim results of consolidated operations are not necessarily indicative of the results for the entire year.

The information in this report should be read in conjunction with the consolidated financial statements and accompanying notes included in the Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities and Exchange Commission (“SEC”). Prior period amounts are reclassified whenever necessary to conform to the current period presentation.

The Company’s significant accounting policies are described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the SEC. For interim reporting purposes, the Company follows the same significant accounting policies, except for the following new accounting pronouncements from the Financial Accounting Standards Board (the “FASB”) that were adopted effective January 1, 2018:

8

• Accounting Standards Update (“ASU”) 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (“ASU 2017-12”). As a result of implementing this standard, the Company reclassified $5 thousand in unrealized losses on derivatives related to hedge ineffectiveness from accumulated other comprehensive income to retained earnings as of January 1, 2018. This ASU will provide more flexibility in the Company’s risk management activities and we believe it will enhance the Company’s ability to employ risk management strategies, while improving the transparency and understanding of those strategies for financial statement users.

• ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). This amendment requires an employer to report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. As a result of the retrospective adoption of this ASU, $256 thousand and $597 thousand for the three and nine months ended September 30, 2017, respectively, have been reclassified from salaries and employee benefits expense to other expense within the Company’s consolidated statement of operations. For the three and nine months ended September 30, 2018, $131 thousand and $411 thousand, respectively, are presented within other expense that would have been presented within salaries and employee benefits prior to adoption of ASU 2017-07.

• ASU 2016-15, Statement of Cash Flows (Topic 230) (“ASU 2016-15”).  This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This ASU is effective for the Company beginning on January 1, 2018. The guidance requires application using a retrospective transition method. This ASU did not have an impact on the Company’s consolidated financial statements.

• ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”). This amendment requires equity investments to be measured at fair value with changes in fair value, net of tax, recognized in net income. As a result of implementing this standard, the Company reclassified $339 thousand in unrealized gains on available-for-sale equity investments, net of tax, from accumulated other comprehensive income to retained earnings as of January 1, 2018. Additionally, this amendment requires that entities use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. As a result of implementing this standard, the Company’s updated process includes identifying a fair value for loans using the exit price notion. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 5: Fair Value Measurements” for further details.

• ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”), which was subsequently amended by additional ASUs, including ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net) and ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, collectively, “ASU 2014-09 et al.” ASU 2014-09 et al. was adopted using the modified retrospective transition method as of January 1, 2018, however no cumulative effect adjustment was required. This new guidance was applied to all revenue contracts in place at the date of adoption. See Part I. Item 1. “Notes to Unaudited Consolidated Financial Statements - Note 13: Revenue Recognition” for further details.

9

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

2.    Earnings Per Share

The treasury stock method of calculating earnings per share (“EPS”) is presented below for the three and nine months ended September 30, 2018 and 2017. The following tables present the computations of basic and diluted EPS:

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
	(In thousands, except share and per share data)
Basic earnings per share - Numerator:
Net income from continuing operations	$	18,886		$	19,691		$	48,328		$	58,180
Less: Net income attributable to noncontrolling interests	924			1,074			2,942			3,190
Net income from continuing operations attributable to the Company	17,962			18,617			45,386			54,990
Decrease/ (increase) in noncontrolling interests’ redemption values (1)	(829		)	(278		)	(391		)	(283		)
Dividends on preferred stock (2)	—			(868		)	(3,985		)	(2,606		)
Total adjustments to income attributable to common shareholders	(829		)	(1,146		)	(4,376		)	(2,889		)
Net income from continuing operations attributable to common shareholders, treasury stock method	17,133			17,471			41,010			52,101
Net income from discontinued operations	—			1,186			1,696			3,881
Net income attributable to common shareholders, treasury stock method	$	17,133		$	18,657		$	42,706		$	55,982
Basic earnings per share - Denominator:
Weighted average basic common shares outstanding	84,017,284			82,556,225			83,544,754			82,270,849
Per share data - Basic earnings per share from:
Continuing operations	$	0.20		$	0.21		$	0.49		$	0.63
Discontinued operations	$	—		$	0.01		$	0.02		$	0.05
Total attributable to common shareholders	$	0.20		$	0.23		$	0.51		$	0.68

10

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
	(In thousands, except share and per share data)
Diluted earnings per share - Numerator:
Net income from continuing operations attributable to common shareholders, after assumed dilution	$	17,133	$	17,471	$	41,010	$	52,101
Net income from discontinued operations	—		1,186		1,696		3,881
Net income attributable to common shareholders, after assumed dilution	$	17,133	$	18,657	$	42,706	$	55,982
Diluted earnings per share - Denominator:
Weighted average basic common shares outstanding	84,017,284		82,556,225		83,544,754		82,270,849
Dilutive effect of:
Stock options, performance-based and time-based restricted stock, and performance-based and time-based restricted stock units, and other dilutive securities (3)	853,906		1,233,888		1,052,855		1,333,830
Warrants to purchase common stock (3)	627,378		1,098,198		656,686		1,136,493
Dilutive common shares	1,481,284		2,332,086		1,709,541		2,470,323
Weighted average diluted common shares outstanding (3)	85,498,568		84,888,311		85,254,295		84,741,172
Per share data - Diluted earnings per share from:
Continuing operations	$	0.20	$	0.21	$	0.48	$	0.61
Discontinued operations	$	—	$	0.01	$	0.02	$	0.05
Total attributable to common shareholders	$	0.20	$	0.22	$	0.50	$	0.66
Dividends per share declared and paid on common stock	$	0.12	$	0.11	$	0.36	$	0.33

_____________________

(1) See Part II. Item 8. “Financial Statements and Supplementary Data - Note 14: Noncontrolling Interests” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017 for a description of the redemption values related to the redeemable noncontrolling interests. In accordance with the FASB Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”), an increase in redemption value from period to period reduces income attributable to common shareholders. Decreases in redemption value from period to period increase income attributable to common shareholders, but only to the extent that the cumulative change in redemption value remains a cumulative increase since adoption of this standard in the first quarter of 2009.

(2) Consideration paid in excess of carrying value for the redemption of the 6.95% Non-Cumulative Perpetual Preferred Stock, Series D (“the Series D preferred stock”) of $2.2 million is considered a deemed dividend and, for purposes of calculating EPS, reduces net income attributable to common shareholders for the three and nine months ended September 30, 2018.

(3) The diluted EPS computations for the three and nine months ended September 30, 2018 and 2017 do not assume the conversion, exercise, or contingent issuance of the following shares for the following periods because the result would have been anti-dilutive for the periods indicated. As a result of the anti-dilution, the potential common shares excluded from the diluted EPS computation are as follows:

	Three months ended September 30,		Nine months ended September 30,
	2018	2017	2018	2017
Shares excluded due to exercise price exceeding the average market price of common shares during the period (total outstanding):	(In thousands)
Potential common shares from:
Stock options	408	48	226	74
Total shares excluded due to exercise price exceeding the average market price of common shares during the period	408	48	226	74

11

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

3.    Reportable segments

Management Reporting

The Company has four reportable segments (Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory), and the Holding Company (Boston Private Financial Holdings, Inc.). The financial performance of the Company is managed and evaluated by these four areas. The segments are managed separately as a result of the concentrations in each function.

Measurement of Segment Profit and Assets

The accounting policies of the segments are the same as those described in Part II. Item 8. “Financial Statements and Supplementary Data - Note 1: Basis of Presentation and Summary of Significant Accounting Policies” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.

Revenues, expenses, and assets are recorded by each segment, and separate financial statements are reviewed by their management and the Company’s segment chief executive officers.

Reconciliation of Reportable Segment Items

The following tables present a reconciliation of the revenues, profits, assets, and other significant items of reportable segments as of and for the three and nine months ended September 30, 2018 and 2017. Interest expense on junior subordinated debentures is reported at the Holding Company.

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Private Banking	(In thousands)
Net interest income	$	60,551		$	57,295		$	177,129		$	169,334
Fees and other income	3,337			3,720			8,637			8,182
Total revenues	63,888			61,015			185,766			177,516
Provision/ (credit) for loan losses	(949		)	(432		)	(2,291		)	(6,727		)
Operating expense	44,706			38,482			124,003			110,444
Income before income taxes	20,131			22,965			64,054			73,799
Income tax expense	4,469			6,634			13,063			22,112
Net income from continuing operations	15,662			16,331			50,991			51,687
Net income attributable to the Company	$	15,662		$	16,331		$	50,991		$	51,687
Assets	$	8,292,901		$	8,113,836		$	8,292,901		$	8,113,836
Depreciation	$	2,398		$	1,431		$	6,013		$	4,145

12

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

	Three months ended September 30,					Nine months ended September 30,
	2018		2017			2018		2017
Wealth Management and Trust	(In thousands)
Fees and other income	$	11,636	$	11,739		$	35,203	$	33,934
Operating expense	10,905		11,752			32,657		37,562
Income/ (loss) before income taxes	731		(13		)	2,546		(3,628		)
Income tax expense/ (benefit)	220		(125		)	729		(1,530		)
Net income/ (loss) from continuing operations	511		112			1,817		(2,098		)
Net income/ (loss) attributable to the Company	$	511	$	112		$	1,817	$	(2,098	)
Assets	$	79,473	$	73,511		$	79,473	$	73,511
Amortization of intangibles	$	701	$	727		$	2,103	$	2,181
Depreciation	$	328	$	330		$	983	$	1,008

	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
Investment Management (1)	(In thousands)
Net interest income	$	—	$	8	$	6	$	16
Fees and other income	3,245		11,280		18,887		33,230
Total revenues	3,245		11,288		18,893		33,246
Operating expense	2,235		8,407		13,880		25,107
Income before income taxes	1,010		2,881		5,013		8,139
Income tax expense	222		981		1,142		2,719
Net income from continuing operations	788		1,900		3,871		5,420
Noncontrolling interests	188		451		878		1,425
Net income attributable to the Company	$	600	$	1,449	$	2,993	$	3,995
Assets	$	7,496	$	93,910	$	7,496	$	93,910
Amortization of intangibles	$	—	$	650	$	—	$	1,951
Depreciation	$	29	$	62	$	95	$	189

13

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
Wealth Advisory	(In thousands)
Net interest income	$	99	$	36	$	224	$	82
Fees and other income	14,022		13,299		41,278		39,122
Total revenues	14,121		13,335		41,502		39,204
Operating expense	9,510		9,174		29,273		27,560
Income before income taxes	4,611		4,161		12,229		11,644
Income tax expense	1,242		1,562		3,242		4,360
Net income from continuing operations	3,369		2,599		8,987		7,284
Noncontrolling interests	736		623		2,064		1,765
Net income attributable to the Company	$	2,633	$	1,976	$	6,923	$	5,519
Assets	$	79,907	$	77,289	$	79,907	$	77,289
Amortization of intangibles	$	49	$	49	$	146	$	146
Depreciation	$	161	$	237	$	488	$	698

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Holding Company and Eliminations	(In thousands)
Net interest income	$	(1,009	)	$	(711	)	$	(2,790	)	$	(2,018	)
Fees and other income	74			229			147			323
Total revenues	(935		)	(482		)	(2,643		)	(1,695		)
Operating expense	1,201			1,531			3,985			5,274
Income/ (loss) before income taxes	(2,136		)	(2,013		)	(6,628		)	(6,969		)
Income tax expense/ (benefit) (2)	(692		)	(763		)	10,710			(2,856		)
Net income/ (loss) from continuing operations	(1,444		)	(1,250		)	(17,338		)	(4,113		)
Discontinued operations	—			1,186			1,696			3,881
Net income/ (loss) attributable to the Company	$	(1,444	)	$	(64	)	$	(15,642	)	$	(232	)
Assets (including eliminations)	$	(83,937	)	$	(89,148	)	$	(83,937	)	$	(89,148	)

14

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
Total Company	(In thousands)
Net interest income	$	59,641		$	56,627		$	174,569		$	167,414
Fees and other income	32,314			40,267			104,152			114,791
Total revenues	91,955			96,894			278,721			282,205
Provision/ (credit) for loan losses	(949		)	(432		)	(2,291		)	(6,727		)
Operating expense	68,557			69,346			203,798			205,947
Income before income taxes	24,347			27,980			77,214			82,985
Income tax expense	5,461			8,289			28,886			24,805
Net income from continuing operations	18,886			19,691			48,328			58,180
Noncontrolling interests	924			1,074			2,942			3,190
Discontinued operations	—			1,186			1,696			3,881
Net income attributable to the Company	$	17,962		$	19,803		$	47,082		$	58,871
Assets	$	8,375,840		$	8,269,398		$	8,375,840		$	8,269,398
Amortization of intangibles	$	750		$	1,426		$	2,249		$	4,278
Depreciation	$	2,916		$	2,060		$	7,579		$	6,040

_____________________

(1) Results for the Investment Management segment for the three and nine months ended September 30, 2017 include results for DGHM and Anchor. Results for the Investment Management segment for the nine months ended September 30, 2018 include results for DGHM and results for Anchor through its sale date in April 2018. Assets for the Investment Management segment at September 30, 2017 include assets of DGHM and Anchor. Assets for the Investment Management segment at September 30, 2018 include assets of DGHM.

(2) Income tax expense/ (benefit) for the nine months ended September 30, 2018 include $12.7 million in additional expense related to the sale of Anchor in April 2018.

15

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

4.    Investments

The following tables present a summary of investment securities:

	Amortized Cost		Unrealized					Fair Value
			Gains		Losses
	(In thousands)
At September 30, 2018
Available-for-sale securities at fair value:
U.S. government and agencies	$	35,025	$	—	$	(1,526	)	$	33,499
Government-sponsored entities	275,767		—		(6,942		)	268,825
Municipal bonds	304,473		1,130		(5,614		)	299,989
Mortgage-backed securities (1)	479,412		208		(25,672		)	453,948
Other (2)	7,079		—		—			7,079
Total	$	1,101,756	$	1,338	$	(39,754	)	$	1,063,340
Held-to-maturity securities at amortized cost:
U.S. government and agencies	$	11,964	—		$	(1	)	$	11,963
Mortgage-backed securities (1)	63,504		—		(2,540		)	60,964
Total	$	75,468	$	—	$	(2,541	)	$	72,927
At December 31, 2017
Available-for-sale securities at fair value:
U.S. government and agencies	$	35,132	$	—	$	(833	)	$	34,299
Government-sponsored entities	305,101		22		(2,622		)	302,501
Municipal bonds	299,647		4,559		(1,148		)	303,058
Mortgage-backed securities (1)	521,753		491		(12,568		)	509,676
Other (2)	20,794		—		—			20,794
Total	$	1,182,427	$	5,072	$	(17,171	)	$	1,170,328
Held-to-maturity securities at amortized cost:
Mortgage-backed securities (1)	$	74,576	$	—	$	(795	)	$	73,781
Total	$	74,576	$	—	$	(795	)	$	73,781

_____________________

(1) All mortgage-backed securities are guaranteed by the U.S. government, U.S. government agencies, or government-sponsored entities.

(2) Included in Other available-for-sale securities as of September 30, 2018 and December 31, 2017 are primarily money market mutual fund securities.

The following table presents the maturities of available-for-sale investment securities, based on contractual maturity, as of September 30, 2018. Certain securities are callable before their final maturity. Additionally, certain securities (such as mortgage-backed securities) are shown within the table below based on their final (contractual) maturity, but due to prepayments and amortization are expected to have shorter lives.

16

BOSTON PRIVATE FINANCIAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Unaudited Consolidated Financial Statements - (Continued)

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