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, 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:



	December 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	623,037	$	520,992
Commercial tax-exempt	451,671		418,698
Total commercial and industrial	1,074,708		939,690
Commercial real estate	2,395,692		2,440,220
Construction and land	240,306		164,990
Residential	2,948,973		2,682,533
Home equity	90,421		99,958
Consumer and other	143,058		177,637
Total	$	6,893,158	$	6,505,028

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



	December 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	2,554	$	748
Commercial tax-exempt	—		—
Total commercial and industrial	2,554		748
Commercial real estate	546		1,985
Construction and land	—		110
Residential	7,914		8,470
Home equity	3,031		2,840
Consumer and other	12		142
Total	$	14,057	$	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 December 31, 2018 and 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 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:



	December 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	$	9,794	$	—	$	9,794	$	979	$	—	$	1,575	$	2,554	$	610,689	$	623,037
Commercial tax-exempt	—		—		—		—		—		—		—		451,671		451,671
Commercial real estate	—		—		—		—		—		546		546		2,395,146		2,395,692
Construction and land	—		—		—		—		—		—		—		240,306		240,306
Residential	6,477		366		6,843		2,639		716		4,559		7,914		2,934,216		2,948,973
Home equity	252		350		602		—		48		2,983		3,031		86,788		90,421
Consumer and other	17		5,043		5,060		8		4		—		12		137,986		143,058
Total	$	16,540	$	5,759	$	22,299	$	3,626	$	768	$	9,663	$	14,057	$	6,856,802	$	6,893,158



	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.

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



	December 31, 2018
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Classified (1)		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	581,278	$	16,213	$	22,992	$	2,554	$	623,037
Commercial tax-exempt	444,835		2,785		4,051		—		451,671
Commercial real estate	2,314,223		53,871		27,052		546		2,395,692
Construction and land	234,647		5,659		—		—		240,306
Residential	2,941,059		—		—		7,914		2,948,973
Home equity	87,390		—		—		3,031		90,421
Consumer and other	143,046		—		—		12		143,058
Total	$	6,746,478	$	78,528	$	54,095	$	14,057	$	6,893,158



	December 31, 2017
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Classified (1)		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

___________________

(1) Accruing Classified includes both Substandard and Doubtful classifications.

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 year ended December 31, 2018
	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	$	1,435	$	2,397	n/a		$	1,614	$	69
Commercial tax-exempt	—		—		n/a		—		—
Commercial real estate	546		900		n/a		2,002		1,544
Construction and land	—		—		n/a		50		16
Residential	8,403		8,764		n/a		9,638		408
Home equity	990		990		n/a		1,041		24
Consumer and other	—		—		n/a		—		—
Subtotal	$	11,374	$	13,051	n/a		$	14,345	$	2,061
With an allowance recorded:
Commercial and industrial	$	1,770	$	1,972	$	598	$	631	$	15
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	—		—		—		4,087		705
Construction and land	—		—		—		—		—
Residential	780		780		75		785		22
Home equity	1,719		1,719		562		959		11
Consumer and other	—		—		—		10		3
Subtotal	$	4,269	$	4,471	$	1,235	$	6,472	$	756
Total:
Commercial and industrial	$	3,205	$	4,369	$	598	$	2,245	$	84
Commercial tax-exempt	—		—		—		—		—
Commercial real estate	546		900		—		6,089		2,249
Construction and land	—		—		—		50		16
Residential	9,183		9,544		75		10,423		430
Home equity	2,709		2,709		562		2,000		35
Consumer and other	—		—		—		10		3
Total	$	15,643	$	17,522	$	1,235	$	20,817	$	2,817

___________________


(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, if applicable, 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 either 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.

As of December 31, 2018 the Bank has pledged $2.6 billion of loans in a blanket lien agreement with the FHLB. The Bank also has $540.0 million of loans pledged as collateral at the FRB for access to their discount window. As of December 31, 2017, the Bank had pledged $2.5 billion of loans to the FHLB and $572.1 million of loans to the FRB.

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 December 31, 2018 and 2017, TDRs totaled $8.0 million and $13.6 million, respectively. As of December 31, 2018, $3.8 million of the $8.0 million of TDRs were on accrual status. As of December 31, 2017, $11.1 million of the $13.6 million of TDRs were on accrual status. As of December 31, 2018 and 2017, the Company had no commitments to lend additional funds to debtors for loans whose terms had been modified in a troubled debt restructuring.

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:



	As of and for the year ended December 31, 2018
	Restructured 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
	(In thousands, except number of loans)
Commercial and industrial	3	$	1,249	$	1,249	1	$	150
Commercial tax-exempt	—	—		—		—	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential	2	2,175		2,210		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	5	$	3,424	$	3,459	1	$	150



	As of and for the year ended December 31, 2018
	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
	(In thousands, except number of loans)
Commercial and industrial	2	$	250	—	$	—	—	$	—	1	$	999	3	$	1,249
Commercial tax-exempt	—	—		—	—		—	—		—	—		—	$	—
Commercial real estate	—	—		—	—		—	—		—	—		—	$	—
Construction and Land	—	—		—	—		—	—		—	—		—	$	—
Residential	—	—		2	2,210		—	—		—	—		2	$	2,210
Home Equity	—	—		—	—		—	—		—	—		—	$	—
Consumer and other	—	—		—	—		—	—		—	—		—	$	—



	As of and for the year ended December 31, 2017
	Restructured 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
	(In thousands, except number of loans)
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 type of concession: temporary reduction of interest rate.

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:



	December 31, 2018		December 31, 2017
	(In thousands)
Commercial and industrial	$	8,024	$	8,484
Commercial tax-exempt	19,105		19,805
Commercial real estate	60,688		49,783
Construction and land	39,966		37,840
Total loan participations serviced for others	$	127,783	$	115,912

Residential	$	33,168	$	41,440
Total loans serviced for others	$	33,168	$	41,440

Any loans to senior management, executive officers, and directors are made in the ordinary course of business, under normal credit terms, including interest rates and collateral requirements prevailing at the time of origination for comparable transactions with other persons and do not represent more than normal credit risk. The Bank’s current policy is generally not to originate these types of loans.

Total loans include deferred loan origination (fees)/ costs, net, of $8.5 million and $6.9 million as of December 31, 2018 and 2017, respectively.