Loan Portfolio and Credit Quality

The Bank’s lending activities are conducted principally in the regions of New England, the San Francisco Bay Area, and Southern California. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, commercial tax exempt 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, the San Francisco Bay Area, and Southern California economies and real estate markets.

Total loans include deferred loan origination (fees)/ costs, net, of $6.6 million and $5.9 million as of June 30, 2017 and December 31, 2016, respectively.

The following table presents a summary of the loan portfolio by portfolio segment and class of receivable as of the dates indicated:



	June 30, 2017		December 31, 2016
	(In thousands)
Commercial and industrial	$	541,756	$	611,370
Commercial tax exempt	416,157		398,604
Total commercial and industrial	957,913		1,009,974
Commercial real estate	2,356,345		2,302,244
Construction and land	130,904		104,839
Residential	2,525,225		2,379,861
Home equity	108,549		118,817
Consumer and other	200,992		198,619
Total	$	6,279,928	$	6,114,354

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



	June 30, 2017		December 31, 2016
	(In thousands)
Commercial and industrial	$	697	$	572
Commercial tax exempt	—		—
Total commercial and industrial	697		572
Commercial real estate	3,004		4,583
Construction and land	232		179
Residential	11,173		10,908
Home equity	1,070		1,072
Consumer and other	—		1
Total	$	16,176	$	17,315

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 no loans 90 days or more past due, but still accruing as of both June 30, 2017 and December 31, 2016. 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, 2017
	Accruing Past Due						Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		Total Accruing Past Due		Current		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	$	665	$	—	$	665	$	445	$	78	$	174	$	697	$	540,394	$	541,756
Commercial tax exempt	—		—		—		—		—		—		—		416,157		416,157
Commercial real estate	—		182		182		970		101		1,933		3,004		2,353,159		2,356,345
Construction and land	—		—		—		65		17		150		232		130,672		130,904
Residential	—		1,140		1,140		4,251		233		6,689		11,173		2,512,912		2,525,225
Home equity	90		339		429		—		—		1,070		1,070		107,050		108,549
Consumer and other	747		31		778		—		—		—		—		200,214		200,992
Total	$	1,502	$	1,692	$	3,194	$	5,731	$	429	$	10,016	$	16,176	$	6,260,558	$	6,279,928



	December 31, 2016
	Accruing Past Due						Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		Total Accruing Past Due		Current		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	$	541	$	1,078	$	1,619	$	537	$	—	$	35	$	572	$	609,179	$	611,370
Commercial tax exempt	—		—		—		—		—		—		—		398,604		398,604
Commercial real estate	3,096		—		3,096		2,311		835		1,437		4,583		2,294,565		2,302,244
Construction and land	—		—		—		129		12		38		179		104,660		104,839
Residential	3,646		536		4,182		2,148		1,274		7,486		10,908		2,364,771		2,379,861
Home equity	245		—		245		—		80		992		1,072		117,500		118,817
Consumer and other	5,995		—		5,995		1		—		—		1		192,623		198,619
Total	$	13,523	$	1,614	$	15,137	$	5,126	$	2,201	$	9,988	$	17,315	$	6,081,902	$	6,114,354

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. Generally, only commercial loans, including commercial real estate, other commercial and industrial loans, commercial tax exempt loans, and construction and land loans, are given a numerical grade.

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, 2016, 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. 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, 2017
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	522,349	$	12,135	$	6,575	$	697	$	541,756
Commercial tax exempt	410,535		5,622		—		—		416,157
Commercial real estate	2,273,184		40,177		39,980		3,004		2,356,345
Construction and land	123,420		4,330		2,922		232		130,904
Residential	2,512,682		—		1,370		11,173		2,525,225
Home equity	107,479		—		—		1,070		108,549
Consumer and other	200,741		—		251		—		200,992
Total	$	6,150,390	$	62,264	$	51,098	$	16,176	$	6,279,928



	December 31, 2016
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	591,388	$	10,133	$	9,277	$	572	$	611,370
Commercial tax exempt	388,544		10,060		—		—		398,604
Commercial real estate	2,230,732		17,233		49,696		4,583		2,302,244
Construction and land	101,254		109		3,297		179		104,839
Residential	2,367,554		—		1,399		10,908		2,379,861
Home equity	117,745		—		—		1,072		118,817
Consumer and other	198,616		—		2		1		198,619
Total	$	5,995,833	$	37,535	$	63,671	$	17,315	$	6,114,354

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, 2017
	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	$	1,771	$	2,377	n/a		$	1,667	$	1,703	$	12	$	25
Commercial tax exempt	—		—		n/a		1,084		1,859		80		80
Commercial real estate	2,879		6,429		n/a		3,358		3,824		724		970
Construction and land	232		568		n/a		190		181		—		—
Residential	9,600		9,971		n/a		9,561		8,958		78		179
Home equity	—		—		n/a		—		—		—		—
Consumer and other	—		—		n/a		—		—		—		—
Subtotal	14,482		19,345		n/a		15,860		16,525		894		1,254
With an allowance recorded:
Commercial and industrial	—		—		$	—	—		—		—		—
Commercial tax exempt	—		—		—		—		—		—		—
Commercial real estate	6,996		7,425		453		7,011		7,042		96		171
Construction and land	—		—		—		—		—		—		—
Residential	2,503		2,503		507		2,613		3,312		23		62
Home equity	36		36		21		37		37		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	9,535		9,964		981		9,661		10,391		119		233
Total:
Commercial and industrial	1,771		2,377		—		1,667		1,703		12		25
Commercial tax exempt	—		—		—		1,084		1,859		80		80
Commercial real estate	9,875		13,854		453		10,369		10,866		820		1,141
Construction and land	232		568		—		190		181		—		—
Residential	12,103		12,474		507		12,174		12,270		101		241
Home equity	36		36		21		37		37		—		—
Consumer and other	—		—		—		—		—		—		—
Total	$	24,017	$	29,309	$	981	$	25,521	$	26,916	$	1,013	$	1,487

_____________________


(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, 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 tax exempt	—		—		n/a		—		—		—		—
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 tax exempt	—		—		—		—		—		—		—
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 tax exempt	—		—		—		—		—		—		—
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 year ended December 31, 2016
	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	$	1,793	$	2,155	n/a		$	5,288	$	249
Commercial tax exempt	—		—		n/a		—		—
Commercial real estate	4,488		9,647		n/a		8,520		1,032
Construction and land	179		507		n/a		1,069		48
Residential	8,134		8,506		n/a		7,446		211
Home equity	—		—		n/a		—		—
Consumer and other	—		—		n/a		—		—
Subtotal	14,594		20,815		n/a		22,323		1,540
With an allowance recorded:
Commercial and industrial	—		—		$	—	31		1
Commercial tax exempt	—		—		—		—		—
Commercial real estate	7,115		7,544		548		7,230		314
Construction and land	—		—		—		507		—
Residential	4,284		4,284		565		5,505		143
Home equity	37		37		22		3		—
Consumer and other	—		—		—		—		—
Subtotal	11,436		11,865		1,135		13,276		458
Total:
Commercial and industrial	1,793		2,155		—		5,319		250
Commercial tax exempt	—		—		—		—		—
Commercial real estate	11,603		17,191		548		15,750		1,346
Construction and land	179		507		—		1,576		48
Residential	12,418		12,790		565		12,951		354
Home equity	37		37		22		3		—
Consumer and other	—		—		—		—		—
Total	$	26,030	$	32,680	$	1,135	$	35,599	$	1,998

_____________________


(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, 2017 and December 31, 2016, TDRs totaled $16.6 million and $18.1 million, respectively. As of June 30, 2017, $11.9 million of the $16.6 million in TDRs were on accrual status. As of December 31, 2016, $12.4 million of the $18.1 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.

There were no loans that were restructured or defaulted as of and during the three and six months ended June 30, 2017. 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 in the current quarter					TDRs that defaulted 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 tax exempt	—	—		—		—	—
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 tax exempt	—	—		—	—		—	—		—	—		—	—
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 in the current quarter					TDRs that defaulted 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 tax exempt	—	—		—		—	—
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 tax exempt	—	—		—	—		—	—		—	—		—	—
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.