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 $7.1 million and $5.9 million as of September 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:



	September 30, 2017		December 31, 2016
	(In thousands)
Commercial and industrial	$	618,256	$	611,370
Commercial tax exempt	431,350		398,604
Total commercial and industrial	1,049,606		1,009,974
Commercial real estate	2,363,159		2,302,244
Construction and land	118,291		104,839
Residential	2,600,788		2,379,861
Home equity	107,227		118,817
Consumer and other	174,130		198,619
Total	$	6,413,201	$	6,114,354

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



	September 30, 2017		December 31, 2016
	(In thousands)
Commercial and industrial	$	968	$	572
Commercial tax exempt	—		—
Total commercial and industrial	968		572
Commercial real estate	2,601		4,583
Construction and land	206		179
Residential	8,765		10,908
Home equity	1,062		1,072
Consumer and other	21		1
Total	$	13,623	$	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 September 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:



	September 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	$	945	$	14	$	959	$	400	$	350	$	218	$	968	$	616,329	$	618,256
Commercial tax exempt	—		—		—		—		—		—		—		431,350		431,350
Commercial real estate	663		244		907		670		—		1,931		2,601		2,359,651		2,363,159
Construction and land	413		—		413		59		4		143		206		117,672		118,291
Residential	—		226		226		5,063		152		3,550		8,765		2,591,797		2,600,788
Home equity	402		1,800		2,202		72		—		990		1,062		103,963		107,227
Consumer and other	568		17		585		13		—		8		21		173,524		174,130
Total	$	2,991	$	2,301	$	5,292	$	6,277	$	506	$	6,840	$	13,623	$	6,394,286	$	6,413,201



	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:



	September 30, 2017
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	598,691	$	10,459	$	8,138	$	968	$	618,256
Commercial tax exempt	425,759		5,591		—		—		431,350
Commercial real estate	2,265,871		57,381		37,306		2,601		2,363,159
Construction and land	106,154		5,243		6,688		206		118,291
Residential	2,590,665		—		1,358		8,765		2,600,788
Home equity	106,165		—		—		1,062		107,227
Consumer and other	173,858		—		251		21		174,130
Total	$	6,267,163	$	78,674	$	53,741	$	13,623	$	6,413,201



	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 nine months ended September 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	$	1,371	$	1,988	n/a		$	1,626	$	1,665	$	18	$	43
Commercial tax exempt	—		—		n/a		—		1,301		—		80
Commercial real estate	2,463		5,972		n/a		2,690		3,465		107		1,077
Construction and land	207		241		n/a		218		191		—		—
Residential	8,859		9,231		n/a		9,069		8,938		98		277
Home equity	—		—		n/a		—		—		—		—
Consumer and other	—		—		n/a		—		—		—		—
Subtotal	12,900		17,432		n/a		13,603		15,560		223		1,477
With an allowance recorded:
Commercial and industrial	598		598		$	242	149		60		1		1
Commercial tax exempt	—		—		—		—		—		—		—
Commercial real estate	6,911		7,341		415		6,955		7,012		76		247
Construction and land	—		—		—		—		—		—		—
Residential	1,200		1,200		127		2,175		2,938		18		80
Home equity	36		36		21		36		37		—		1
Consumer and other	—		—		—		—		—		—		—
Subtotal	8,745		9,175		805		9,315		10,047		95		329
Total:
Commercial and industrial	1,969		2,586		242		1,775		1,725		19		44
Commercial tax exempt	—		—		—		—		1,301		—		80
Commercial real estate	9,374		13,313		415		9,645		10,477		183		1,324
Construction and land	207		241		—		218		191		—		—
Residential	10,059		10,431		127		11,244		11,876		116		357
Home equity	36		36		21		36		37		—		1
Consumer and other	—		—		—		—		—		—		—
Total	$	21,645	$	26,607	$	805	$	22,918	$	25,607	$	318	$	1,806

_____________________


(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 nine months ended September 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	$	11,742	$	13,874	n/a		$	10,774	$	6,325	$	98	$	169
Commercial tax exempt	—		—		n/a		—		—		—		—
Commercial real estate	5,966		11,148		n/a		7,288		9,672		332		874
Construction and land	224		548		n/a		400		1,332		48		48
Residential	6,472		6,832		n/a		7,345		7,345		59		173
Home equity	—		—		n/a		—		—		—		—
Consumer and other	—		—		n/a		—		—		—		—
Subtotal	24,404		32,402		n/a		25,807		24,674		537		1,264
With an allowance recorded:
Commercial and industrial	37		37		$	22	37		33		—		1
Commercial tax exempt	—		—		—		—		—		—		—
Commercial real estate	7,164		7,593		593		7,194		7,259		79		237
Construction and land	—		—		—		—		660		—		—
Residential	6,877		6,877		701		5,977		5,994		36		115
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	14,078		14,507		1,316		13,208		13,946		115		353
Total:
Commercial and industrial	11,779		13,911		22		10,811		6,358		98		170
Commercial tax exempt	—		—		—		—		—		—		—
Commercial real estate	13,130		18,741		593		14,482		16,931		411		1,111
Construction and land	224		548		—		400		1,992		48		48
Residential	13,349		13,709		701		13,322		13,339		95		288
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Total	$	38,482	$	46,909	$	1,316	$	39,015	$	38,620	$	652	$	1,617

_____________________


(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 September 30, 2017 and December 31, 2016, TDRs totaled $14.7 million and $18.1 million, respectively. As of September 30, 2017, $11.5 million of the $14.7 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.

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 and nine months ended September 30, 2017
	Restructured in the current quarter and year to date					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	—	$	—	$	—	—	$	—
Commercial tax exempt	—	—		—		—	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential (1)	1	108		109		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	1	$	108	$	109	—	$	—

_____________________


(1)	Represents the following concession: temporary rate reduction.



	As of and for the three months ended September 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	—	$	—	$	—	—	$	—
Commercial tax exempt	—	—		—		—	—
Commercial real estate	—	—		—		1	1,276
Construction and land	—	—		—		—	—
Residential	—	—		—		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	—	$	—	$	—	1	$	1,276



	As of and for the nine months ended September 30, 2016
	Restructured in the current year to date					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		1	1,276
Construction and land	—	—		—		—	—
Residential	2	260		261		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	6	$	8,920	$	8,746	1	$	1,276



	As of and for the nine months ended September 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.