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.

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



	March 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	531,093	$	520,992
Commercial tax-exempt	420,757		418,698
Total commercial and industrial	951,850		939,690
Commercial real estate	2,465,003		2,440,220
Construction and land	165,240		164,990
Residential	2,737,369		2,682,533
Home equity	94,331		99,958
Consumer and other	188,534		177,637
Total	$	6,602,327	$	6,505,028

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



	March 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	1,669	$	748
Commercial tax-exempt	—		—
Total commercial and industrial	1,669		748
Commercial real estate	1,839		1,985
Construction and land	109		110
Residential	9,932		8,470
Home equity	2,816		2,840
Consumer and other	15		142
Total	$	16,380	$	14,295

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 March 31, 2018 and December 31, 2017. 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 receivable by class of receivable as of the dates indicated:



	March 31, 2018
	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	$	3,894	$	700	$	4,594	$	311	$	100	$	1,258	$	1,669	$	524,830	$	531,093
Commercial tax-exempt	—		—		—		—		—		—		—		420,757		420,757
Commercial real estate	2,507		—		2,507		1		151		1,687		1,839		2,460,657		2,465,003
Construction and land	64		—		64		—		—		109		109		165,067		165,240
Residential	12,489		—		12,489		3,183		3,115		3,634		9,932		2,714,948		2,737,369
Home equity	325		339		664		67		—		2,749		2,816		90,851		94,331
Consumer and other	58		—		58		—		6		9		15		188,461		188,534
Total	$	19,337	$	1,039	$	20,376	$	3,562	$	3,372	$	9,446	$	16,380	$	6,565,571	$	6,602,327



	December 31, 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	$	10,903	$	849	$	11,752	$	355	$	—	$	393	$	748	$	508,492	$	520,992
Commercial tax-exempt	—		—		—		—		—		—		—		418,698		418,698
Commercial real estate	4,043		—		4,043		163		—		1,822		1,985		2,434,192		2,440,220
Construction and land	—		—		—		—		—		110		110		164,880		164,990
Residential	7,239		1,635		8,874		805		3,172		4,493		8,470		2,665,189		2,682,533
Home equity	355		—		355		—		71		2,769		2,840		96,763		99,958
Consumer and other	24		—		24		17		125		—		142		177,471		177,637
Total	$	22,564	$	2,484	$	25,048	$	1,340	$	3,368	$	9,587	$	14,295	$	6,465,685	$	6,505,028

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, 2017, 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:



	March 31, 2018
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	512,546	$	11,452	$	5,426	$	1,669	$	531,093
Commercial tax-exempt	420,757		—		—		—		420,757
Commercial real estate	2,380,144		51,636		31,384		1,839		2,465,003
Construction and land	158,108		—		7,023		109		165,240
Residential	2,726,100		—		1,337		9,932		2,737,369
Home equity	91,515		—		—		2,816		94,331
Consumer and other	188,516		—		3		15		188,534
Total	$	6,477,686	$	63,088	$	45,173	$	16,380	$	6,602,327



	December 31, 2017
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	496,395	$	12,898	$	10,951	$	748	$	520,992
Commercial tax-exempt	413,139		5,559		—		—		418,698
Commercial real estate	2,346,833		56,947		34,455		1,985		2,440,220
Construction and land	146,514		11,770		6,596		110		164,990
Residential	2,672,714		—		1,349		8,470		2,682,533
Home equity	97,118		—		—		2,840		99,958
Consumer and other	177,494		—		1		142		177,637
Total	$	6,350,207	$	87,174	$	53,352	$	14,295	$	6,505,028

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 months ended March 31, 2018
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	2,100	$	3,129	n/a		$	1,689	$	7
Commercial tax-exempt	—		—		n/a		—		—
Commercial real estate	2,947		4,710		n/a		2,103		25
Construction and land	109		109		n/a		109		—
Residential	10,717		11,077		n/a		9,608		101
Home equity	1,759		1,759		n/a		1,770		10
Consumer and other	—		—		n/a		—		—
Subtotal	17,632		20,784		n/a		15,279		143
With an allowance recorded:
Commercial and industrial	—		—		$	—	181		2
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	5,525		5,954		241		6,510		156
Construction and land	—		—		—		—		—
Residential	821		821		83		825		6
Home equity	36		36		20		36		—
Consumer and other	—		—		—		31		3
Subtotal	6,382		6,811		344		7,583		167
Total:
Commercial and industrial	2,100		3,129		—		1,870		9
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	8,472		10,664		241		8,613		181
Construction and land	109		109		—		109		—
Residential	11,538		11,898		83		10,433		107
Home equity	1,795		1,795		20		1,806		10
Consumer and other	—		—		—		31		3
Total	$	24,014	$	27,595	$	344	$	22,862	$	310

_____________________


(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 months ended March 31, 2017
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		YTD Average Recorded Investment		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	1,670	$	2,045	n/a		$	1,731	$	13
Commercial tax-exempt	4,337		4,337		n/a		3,253		—
Commercial real estate	3,747		8,787		n/a		4,269		246
Construction and land	147		479		n/a		164		—
Residential	9,401		9,773		n/a		8,465		101
Home equity	—		—		n/a		—		—
Consumer and other	—		—		n/a		—		—
Subtotal	19,302		25,421		n/a		17,882		360
With an allowance recorded:
Commercial and industrial	—		—		$	—	—		—
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	7,041		7,470		475		7,073		75
Construction and land	—		—		—		—		—
Residential	2,931		2,931		517		3,917		39
Home equity	37		37		21		37		—
Consumer and other	—		—		—		—		—
Subtotal	10,009		10,438		1,013		11,027		114
Total:
Commercial and industrial	1,670		2,045		—		1,731		13
Commercial tax-exempt	4,337		4,337		—		3,253		—
Commercial real estate	10,788		16,257		475		11,342		321
Construction and land	147		479		—		164		—
Residential	12,332		12,704		517		12,382		140
Home equity	37		37		21		37		—
Consumer and other	—		—		—		—		—
Total	$	29,311	$	35,859	$	1,013	$	28,909	$	474

_____________________


(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, 2017
	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	$	1,434	$	2,238	n/a		$	1,594	$	50
Commercial tax-exempt	—		—		n/a		1,001		80
Commercial real estate	1,832		3,453		n/a		3,098		1,546
Construction and land	109		109		n/a		172		—
Residential	9,337		9,709		n/a		9,033		360
Home equity	1,779		1,779		n/a		413		—
Consumer and other	—		—		n/a		—		—
Subtotal	14,491		17,288		n/a		15,311		2,036
With an allowance recorded:
Commercial and industrial	242		242		$	58	156		4
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	6,855		7,284		362		6,980		322
Construction and land	—		—		—		—		—
Residential	828		828		89		2,469		89
Home equity	36		36		20		36		1
Consumer and other	125		250		125		10		—
Subtotal	8,086		8,640		654		9,651		416
Total:
Commercial and industrial	1,676		2,480		58		1,750		54
Commercial tax-exempt	—		—		—		1,001		80
Commercial real estate	8,687		10,737		362		10,078		1,868
Construction and land	109		109		—		172		—
Residential	10,165		10,537		89		11,502		449
Home equity	1,815		1,815		20		449		1
Consumer and other	125		250		125		10		—
Total	$	22,577	$	25,928	$	654	$	24,962	$	2,452

_____________________


(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 March 31, 2018 and December 31, 2017, TDRs totaled $13.2 million and $13.6 million, respectively. As of March 31, 2018, $10.9 million of the $13.2 million in TDRs were on accrual status. As of December 31, 2017, $11.1 million of the $13.6 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. There were no loans that were restructured or defaulted during the three months ended March 31, 2018 or 2017.

Loan participations serviced for others and loans serviced for others are not included in the Company’s total loans. The following table presents a summary of the loan participations serviced for others and loans serviced for others based on class of receivable as of the dates indicated:



	March 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	8,397	$	8,484
Commercial tax-exempt	19,582		19,805
Commercial real estate	43,965		49,783
Construction and land	34,081		37,840
Total loan participations serviced for others	$	106,025	$	115,912

Residential	$	41,207	$	41,440
Total loans serviced for others	$	41,207	$	41,440

Total loans include deferred loan origination (fees)/ costs, net, of $7.5 million and $6.9 million as of March 31, 2018 and December 31, 2017, respectively.