Fair Value Measurements

3 Months Ended

Mar. 31, 2020

Fair Value Disclosures [Abstract]

Fair Value Measurements

Fair Value MeasurementsFair 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 March 31, 2020 and December 31, 2019, aggregated by the level in the fair value hierarchy within which those measurements fall:

	As of March 31, 2020		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	$	21,087	$	—	$	21,087	$	—
Government-sponsored entities	160,442		—		160,442		—
Municipal bonds	332,500		—		332,500		—
Mortgage-backed securities	479,137		—		479,137		—
Total available-for-sale securities	993,166		—		993,166		—
Equity securities	23,080		23,080		—		—
Derivatives - interest rate customer swaps	93,391		—		93,391		—
Derivatives - risk participation agreement	46		—		46		—
Trading securities held in the “rabbi trust” (1)	5,550		5,550		—		—
Liabilities:
Derivatives - interest rate customer swaps	$	94,437	$	—	$	94,437	$	—
Derivatives - risk participation agreement	480		—		480		—
Deferred compensation “rabbi trust” (1)	5,550		5,550		—		—

			Fair value measurements at reporting date using:
	As of December 31, 2019		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	$	19,940	$	—	$	19,940	$	—
Government-sponsored entities	156,255		—		156,255		—
Municipal bonds	325,455		—		325,455		—
Mortgage-backed securities	476,634		—		476,634		—
Total available-for-sale securities	978,284		—		978,284		—
Equity securities	18,810		18,810		—		—
Derivatives - interest rate customer swaps	36,089		—		36,089		—
Derivatives - risk participation agreements	10		—		10		—
Trading securities held in the “rabbi trust” (1)	6,119		6,119		—		—
Liabilities:
Derivatives - interest rate customer swaps	$	36,580	$	—	$	36,580	$	—
Derivatives - risk participation agreements	242		—		242		—
Deferred compensation “rabbi trust” (1)	6,112		6,112		—		—

_____________________

(1) The Company has adopted a special trust for the Deferred Compensation Plan called a “rabbi trust”. The 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. 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.

As of March 31, 2020 and December 31, 2019, available-for-sale securities consisted of U.S. government and agencies securities, government-sponsored entities securities, municipal bonds, and mortgage-backed 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, “off-the-run” U.S. Treasury securities, and certain investments in SBA loans (which are categorized as U.S. government and agencies securities). “Off-the-run” U.S. Treasury securities are Treasury bonds and notes issued before the most recently issued bond or note of a particular maturity. When Treasuries move to the secondary over-the-counter market, they become less frequently traded, therefore, they are considered “off-the-run.” No investments held as of March 31, 2020 or December 31, 2019 were categorized as Level 3.

As of March 31, 2020 and December 31, 2019, equity securities consisted of Level 1 money market mutual funds that are valued with prices quoted in active markets.

In managing its interest rate and credit risk, the Company may utilize 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 March 31, 2020 and December 31, 2019. 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 are within Level 2. 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 March 31, 2020 and December 31, 2019.

Trading securities held in the rabbi trust consist of publicly traded mutual fund investments that are valued at prices quoted in active markets. Therefore, they have been categorized as Level 1 as of March 31, 2020 and December 31, 2019.

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 Sheets. Changes in the fair value of the securities are recorded as an increase or decrease in other income each quarter. The deferred compensation liability reflects the market value of the securities selected by the participants and is included within other liabilities on the Consolidated Balance Sheets. Changes in the fair value of the liability are recorded as an increase or decrease in salaries and employee benefits expense each quarter.

There were no transfers for assets or liabilities recorded at fair value on a recurring basis as of March 31, 2020 and December 31, 2019. There were no Level 3 assets valued on a recurring basis at March 31, 2020 or December 31, 2019. There were no changes in the valuation techniques used for measuring the fair value.

The following tables present the Company’s assets and liabilities measured at fair value on a non-recurring basis during the periods ended March 31, 2020 and 2019, respectively, aggregated by the level in the fair value hierarchy within which those measurements fall.

	As of March 31, 2020		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
			Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended March 31, 2020
	(In thousands)
Assets:
Impaired loans (1)	$	97	$	—	$	—	$	97	$	21

_____________________

(1)Collateral-dependent impaired loans held as of March 31, 2020 that had write-downs or recoveries in fair value or whose specific reserve changed during the three months ended March 31, 2020.

	As of March 31, 2019		Fair value measurements at reporting date using:						Gain (losses) from fair value changes
			Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Three months ended March 31, 2019
	(In thousands)
Assets:
Impaired loans (1)	$	957	$	—	$	—	$	957	$	372

_____________________

(1)Collateral-dependent impaired loans held as of March 31, 2019 that had write-downs or recoveries in fair value or whose specific reserve changed during the three months ended March 31, 2019.

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 March 31, 2020
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	97	Appraisals of Collateral	Discount for costs to sell	10% - 10%	10%
				Appraisal adjustments	—%	—%

	As of March 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range of Inputs Utilized	Weighted Average of Inputs Utilized
	(In thousands)
Impaired Loans	$	957	Appraisals of Collateral	Discount for costs to sell	—% - 6%	1%
				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 may 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 March 31, 2020
	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	$	61,714	$	61,714	$	61,714	$	—	$	—
Investment securities held-to-maturity	45,395		46,096		—		46,096		—
Loans held for sale	7,671		7,724		—		7,724		—
Loans, net	6,975,127		6,752,894		—		—		6,752,894
Other financial assets	73,576		73,576		—		73,576		—
FINANCIAL LIABILITIES:
Deposits	6,835,572		6,838,860		—		6,838,860		—
Securities sold under agreements to repurchase	45,319		45,319		—		45,319		—
Federal funds purchased	145,000		145,000		—		145,000		—
Federal Home Loan Bank borrowings	491,254		493,532		—		493,532		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	2,154		2,154		—		2,154		—

	As of December 31, 2019
	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	$	292,479	$	292,479	$	292,479	$	—	$	—
Investment securities held-to-maturity	48,212		47,949		—		47,949		—
Loans held for sale	7,386		7,475		—		7,475		—
Loans, net	6,904,722		6,883,360		—		—		6,883,360
Other financial assets	67,348		67,348		—		67,348		—
FINANCIAL LIABILITIES:
Deposits	7,241,476		7,241,739		—		7,241,739		—
Securities sold under agreements to repurchase	53,398		53,398		—		53,398		—
Federal Home Loan Bank borrowings	350,829		351,233		—		351,233		—
Junior subordinated debentures	106,363		96,363		—		—		96,363
Other financial liabilities	1,957		1,957		—		1,957		—

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 these assets are classified as Level 1 measurements.

Investment securities held-to-maturity

Investment securities held-to-maturity consist of mortgage-backed securities as of March 31, 2020 and December 31, 2019. 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 classified as Level 2.

There were no transfers of the Company's financial instruments that are not measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019.

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. The Company estimates the fair value of loans using the exit price notion under ASU 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, 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 indexes. Loans, net are included in the Level 3 fair value category based upon the inputs and valuation techniques used.

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 these assets are classified as Level 2 measurements.

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 these liabilities are classified as Level 2 measurements. 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 these liabilities are classified as Level 2 measurements.

Securities sold under agreements to repurchase

The fair values 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 these liabilities have been classified as Level 2 measurements.

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 measurements.

Federal Home Loan Bank borrowings

The fair values reported for FHLB borrowings are 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 measurements.

Junior subordinated debentures

The fair values of the junior subordinated debentures issued by Boston Private Capital Trust I and Boston Private Capital Trust II are 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 measurements.

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.