Loan Portfolio and Credit Quality

The Bank’s lending activities are conducted principally in the regions of New England, San Francisco Bay Area, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, construction and land loans, and home equity and other consumer loans. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, San Francisco Bay Area, and Southern California economies and real estate markets.

Total loans include deferred loan origination (fees)/ costs, net, of $6.4 million and $5.6 million as of June 30, 2016 and December 31, 2015, respectively.

The following table presents a summary of the loan portfolio based on the portfolio segment as of the dates indicated:



	June 30, 2016		December 31, 2015
	(In thousands)
Commercial and industrial	$	1,042,917	$	1,111,555
Commercial real estate	1,977,312		1,914,134
Construction and land	142,549		183,434
Residential	2,280,116		2,229,540
Home equity	125,486		119,828
Consumer and other	183,117		160,721
Total Loans	$	5,751,497	$	5,719,212

The following table presents nonaccrual loans receivable by class of receivable as of the dates indicated:



	June 30, 2016		December 31, 2015
	(In thousands)
Commercial and industrial	$	1,106	$	1,019
Commercial real estate	6,934		11,232
Construction and land	861		3,297
Residential	8,967		9,661
Home equity	1,295		1,306
Consumer and other	25		56
Total	$	19,188	$	26,571

The Bank’s policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were $0.1 million and no loans 90 days or more past due, but still accruing, respectively, as of June 30, 2016 and December 31, 2015. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.

The following tables show the payment status of loans by class of receivable as of the dates indicated:



	June 30, 2016
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90 Days or Greater Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	3,151	$	—	$	—	$	3,151	$	1,106	$	—	$	—	$	1,106	$	1,038,660	$	1,042,917
Commercial real estate	1,329		161		—		1,490		3,922		—		3,012		6,934		1,968,888		1,977,312
Construction and land	—		—		115		115		74		29		758		861		141,573		142,549
Residential	—		2,481		—		2,481		2,843		765		5,359		8,967		2,268,668		2,280,116
Home equity	239		—		—		239		84		—		1,211		1,295		123,952		125,486
Consumer and other	75		190		—		265		10		8		7		25		182,827		183,117
Total	$	4,794	$	2,832	$	115	$	7,741	$	8,039	$	802	$	10,347	$	19,188	$	5,724,568	$	5,751,497



	December 31, 2015
	Accruing Past Due						Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90 Days or Greater Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	2,329	$	338	$	2,667	$	726	$	—	$	293	$	1,019	$	1,107,869	$	1,111,555
Commercial real estate	2,091		529		2,620		5,912		—		5,320		11,232		1,900,282		1,914,134
Construction and land	—		—		—		149		34		3,114		3,297		180,137		183,434
Residential	6,267		873		7,140		924		874		7,863		9,661		2,212,739		2,229,540
Home equity	40		—		40		217		—		1,089		1,306		118,482		119,828
Consumer and other	235		392		627		24		9		23		56		160,038		160,721
Total	$	10,962	$	2,132	$	13,094	$	7,952	$	917	$	17,702	$	26,571	$	5,679,547	$	5,719,212

Nonaccrual and delinquent loans are affected by many factors, such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic decline, borrowers may become more severely affected over time as liquidity levels decline and the borrower’s ability to continue to make payments deteriorates. With respect to real estate collateral values, the declines from the peak, as well as the value of the real estate at the time of origination versus the current value, can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank’s underwriting standards and may be considered for classification as a problem loan dependent upon a review of risk factors.

Generally when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values.

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Credit Quality Indicators

The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk.

A summary of the rating system used by the Bank, repeated here from 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, 2015, follows:

Pass - All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. Generally, only commercial loans, including commercial real estate, commercial and industrial loans, and construction and land loans are given a numerical grade. For residential, home equity and consumer loans, the Bank classifies loans as pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.

Special Mention - Loans rated in this category are defined as having potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank’s credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower’s financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.

Substandard - Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or nonaccruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.

Doubtful - Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions, and values, is highly questionable and improbable. Loans in this category are usually on nonaccrual and classified as impaired.

The following tables present the loan portfolio’s credit risk profile by internally assigned grade and class of receivable as of the dates indicated:



	June 30, 2016
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	1,009,528	$	17,084	$	15,199	$	1,106	$	1,042,917
Commercial real estate	1,895,974		35,760		38,644		6,934		1,977,312
Construction and land	125,069		12,796		3,823		861		142,549
Residential	2,264,593		—		6,556		8,967		2,280,116
Home equity	124,191		—		—		1,295		125,486
Consumer and other	181,402		1,688		2		25		183,117
Total	$	5,600,757	$	67,328	$	64,224	$	19,188	$	5,751,497



	December 31, 2015
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	1,070,438	$	28,643	$	11,455	$	1,019	$	1,111,555
Commercial real estate	1,841,603		27,594		33,705		11,232		1,914,134
Construction and land	162,563		12,974		4,600		3,297		183,434
Residential	2,213,204		—		6,675		9,661		2,229,540
Home equity	118,522		—		—		1,306		119,828
Consumer and other	158,686		—		1,979		56		160,721
Total	$	5,565,016	$	69,211	$	58,414	$	26,571	$	5,719,212

The following tables present, by class of receivable, the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans:



	As of and for the three and six months ended June 30, 2016
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		QTD Average Recorded Investment		YTD Average Recorded Investment		QTD Interest Income Recognized while Impaired		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	8,595	$	10,622	n/a		$	5,668	$	4,107	$	59	$	71
Commercial real estate	7,780		14,088		n/a		9,794		10,764		504		542
Construction and land	861		1,793		n/a		2,337		1,797		—		—
Residential	7,653		8,013		n/a		7,565		7,389		57		114
Home equity	—		—		n/a		—		—		—		—
Consumer and other	—		—		n/a		—		—		—		—
Subtotal	24,889		34,516		n/a		25,364		24,057		620		727
With an allowance recorded:
Commercial and industrial	37		37		$	22	44		31		—		1
Commercial real estate	7,233		7,662		640		7,266		7,294		78		158
Construction and land	—		—		—		—		943		—		—
Residential	5,682		5,682		439		5,630		5,958		36		79
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	12,952		13,381		1,101		12,940		14,226		114		238
Total:
Commercial and industrial	8,632		10,659		22		5,712		4,138		59		72
Commercial real estate	15,013		21,750		640		17,060		18,058		582		700
Construction and land	861		1,793		—		2,337		2,740		—		—
Residential	13,335		13,695		439		13,195		13,347		93		193
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Total	$	37,841	$	47,897	$	1,101	$	38,304	$	38,283	$	734	$	965

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.



	As of and for the three and six months ended June 30, 2015
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		QTD Average Recorded Investment		YTD Average Recorded Investment		QTD Interest Income Recognized while Impaired		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	1,479	$	1,537	n/a		$	509	$	1,152	$	1	$	808
Commercial real estate	18,050		25,881		n/a		18,675		19,808		72		966
Construction and land	1,215		2,240		n/a		1,243		4,637		—		92
Residential	10,239		11,026		n/a		9,444		9,527		73		151
Home equity	50		50		n/a		50		50		—		1
Consumer and other	1,007		1,007		n/a		1,007		1,007		1		1
Subtotal	32,040		41,741		n/a		30,928		36,181		147		2,019
With an allowance recorded:
Commercial and industrial	1,701		1,714		$	316	1,350		1,203		20		54
Commercial real estate	7,144		7,572		776		8,095		8,504		124		216
Construction and land	2,200		2,356		172		2,200		2,200		—		—
Residential	7,329		7,681		1,234		7,479		7,257		51		100
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	18,374		19,323		2,498		19,124		19,164		195		370
Total:
Commercial and industrial	3,180		3,251		316		1,859		2,355		21		862
Commercial real estate	25,194		33,453		776		26,770		28,312		196		1,182
Construction and land	3,415		4,596		172		3,443		6,837		—		92
Residential	17,568		18,707		1,234		16,923		16,784		124		251
Home equity	50		50		—		50		50		—		1
Consumer and other	1,007		1,007		—		1,007		1,007		1		1
Total	$	50,414	$	61,064	$	2,498	$	50,052	$	55,345	$	342	$	2,389

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.



	As of and for the year ended December 31, 2015
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	2,259	$	2,569	n/a		$	1,638	$	836
Commercial real estate	12,116		20,113		n/a		17,885		1,494
Construction and land	1,097		2,132		n/a		3,027		92
Residential	7,788		8,576		n/a		9,384		269
Home equity	—		—		n/a		42		2
Consumer and other	—		—		n/a		545		61
Subtotal	23,260		33,390		n/a		32,521		2,754
With an allowance recorded:
Commercial and industrial	15		15		$	270	657		66
Commercial real estate	7,346		7,775		713		8,749		385
Construction and land	2,200		2,356		172		2,200		—
Residential	6,351		6,966		474		6,940		186
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	15,912		17,112		1,629		18,546		637
Total:
Commercial and industrial	2,274		2,584		270		2,295		902
Commercial real estate	19,462		27,888		713		26,634		1,879
Construction and land	3,297		4,488		172		5,227		92
Residential	14,139		15,542		474		16,324		455
Home equity	—		—		—		42		2
Consumer and other	—		—		—		545		61
Total	$	39,172	$	50,502	$	1,629	$	51,067	$	3,391

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs and historical nonaccrual interest paid, which was applied to principal.

When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, the loan is designated as impaired.

Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. Impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan’s contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls in the analysis on collateral dependent loans would result in the impairment amount being charged-off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as specific allocations to the general reserve unless a known loss is determined to have occurred, in which case such known loss is charged-off.

Loans in the held for sale category are carried at the lower of amortized cost or estimated fair value in the aggregate and are excluded from the allowance for loan losses analysis.

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. As of June 30, 2016 and December 31, 2015, TDRs totaled $30.4 million and $30.6 million, respectively. As of June 30, 2016, $23.9 million of the $30.4 million in TDRs were on accrual status. As of December 31, 2015, $18.6 million of the $30.6 million in TDRs were on accrual status.

Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general or allocated reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a nonaccruing loan is categorized as a TDR.

The following tables present the balance of TDRs that were restructured or defaulted during the periods indicated and the types of concessions granted:



	As of and for the three months ended June 30, 2016
	Restructured current quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial	2	$	7,209	$	7,209	—	$	—
Commercial real estate	1	1,276		1,276		—	—
Construction and land	—	—		—		—	—
Residential	1	115		116		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	4	$	8,600	$	8,601	—	$	—



	As of and for the three months ended June 30, 2016
	Extension of term			Temporary rate reduction			Payment deferral			Combination of concessions (1)			Total concessions
	# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment
	(Dollars in thousands)
Commercial and industrial	2	$	7,209	—	$	—	—	$	—	—	$	—	2	$	7,209
Commercial real estate	—	—		—	—		—	—		1	1,276		1	1,276
Construction and land	—	—		—	—		—	—		—	—		—	—
Residential	—	—		1	116		—	—		—	—		1	116
Home equity	—	—		—	—		—	—		—	—		—	—
Consumer and other	—	—		—	—		—	—		—	—		—	—

______________________


(1)	Combination of concessions includes loans that have had more than one modification, including extension of term, temporary reduction of interest rate, and/or payment deferral.



	As of and for the six months ended June 30, 2016
	Restructured year to date					TDRs that defaulted year to date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial	3	$	7,384	$	7,209	—	$	—
Commercial real estate	1	1,276		1,276		—	—
Construction and land	—	—		—		—	—
Residential	2	260		261		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	6	$	8,920	$	8,746	—	$	—



	As of and for the six months ended June 30, 2016
	Extension of term			Temporary rate reduction			Payment deferral			Combination of concessions (1)			Total concessions
	# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment
	(Dollars in thousands)
Commercial and industrial	2	$	7,209	—	$	—	—	$	—	1	$	—	3	$	7,209
Commercial real estate	—	—		—	—		—	—		1	1,276		1	1,276
Construction and land	—	—		—	—		—	—		—	—		—	—
Residential	—	—		2	261		—	—		—	—		2	261
Home equity	—	—		—	—		—	—		—	—		—	—
Consumer and other	—	—		—	—		—	—		—	—		—	—

______________________


(1)	Combination of concessions includes loans that have had more than one modification, including extension of term, temporary reduction of interest rate, and/or payment deferral.



	As of and for the three months ended June 30, 2015
	Restructured current quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial	1	$	1,298	$	1,304	—	$	—
Commercial real estate	1	4,118		4,118		—	—
Construction and land	—	—		—		—	—
Residential	2	131		134		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	4	$	5,547	$	5,556	—	$	—



	As of and for the three months ended June 30, 2015
	Extension of term			Temporary rate reduction			Payment deferral			Combination of concessions (1)			Total concessions
	# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment
	(Dollars in thousands)
Commercial and industrial	—	$	—	—	$	—	—	$	—	1	$	1,304	1	$	1,304
Commercial real estate	1	4,118		—	—		—	—		—	—		1	4,118
Construction and land	—	—		—	—		—	—		—	—		—	—
Residential	—	—		1	109		1	25		—	—		2	134
Home equity	—	—		—	—		—	—		—	—		—	—
Consumer and other	—	—		—	—		—	—		—	—		—	—

______________________


(1)	Combination of concessions includes loans that have had more than one modification, including extension of term, temporary reduction of interest rate, and/or payment deferral.



	As of and for the six months ended June 30, 2015
	Restructured year to date					TDRs that defaulted year to date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
	(Dollars in thousands)
Commercial and industrial	1	$	1,298	$	1,304	—	$	—
Commercial real estate	1	4,118		4,118		—	—
Construction and land	—	—		—		—	—
Residential	8	513		516		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	10	$	5,929	$	5,938	—	$	—



	As of and for the six months ended June 30, 2015
	Extension of term			Temporary rate reduction			Payment deferral			Combination of concessions (1)			Total concessions
	# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment		# of Loans	Post- modifi- cation recorded invest- ment
	(Dollars in thousands)
Commercial and industrial	—	$	—	—	$	—	—	$	—	1	$	1,304	1	$	1,304
Commercial real estate	1	4,118		—	—		—	—		—	—		1	4,118
Construction and land	—	—		—	—		—	—		—	—		—	—
Residential	—	—		7	491		1	25		—	—		8	516
Home equity	—	—		—	—		—	—		—	—		—	—
Consumer and other	—	—		—	—		—	—		—	—		—	—

______________________


(1)	Combination of concessions includes loans that have had more than one modification, including extension of term, temporary reduction of interest rate, and/or payment deferral.