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Section 1: 10-K (2017 10-K BPFH)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
FORM 10-K
______________________________________________________________
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended December 31, 2017
 
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to
       
Commission file number 0-17089
______________________________________________________________
BOSTON PRIVATE FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
______________________________________________________________
Commonwealth of Massachusetts
 
04-2976299
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)
 
 
Ten Post Office Square
Boston, Massachusetts
 
02109
(Address of principal executive offices)
 
(Zip Code)
 
 
(Registrant’s telephone number, including area code): (617) 912-1900
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock
 
The NASDAQ Stock Market LLC
Depositary Shares Each Representing a 1/40th Interest in a Share of 6.95% Non-Cumulative Perpetual Preferred Stock, Series D
 
The NASDAQ Stock Market LLC
Warrants to Purchase Shares of Common Stock, and Underlying Shares of Common Stock, Par Value $1.00 Per Share
 
The NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(g) of the Act: None
_______________________________________________________________

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  o    No  x
Indicate by check mark whether the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Securities Act.    Yes  o    No  x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer x
 
 
 
Accelerated filer o    
 
 
Non-accelerated filer o   
 
(Do not check if a smaller reporting company)
 
Smaller reporting company o    
 
 
 
 
 
 
Emerging growth company o    
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)    Yes  o    No  x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the last reported sales price on the NASDAQ Global Select Market on June 30, 2017 was $1,263,534,759.
The number of shares of the registrant’s common stock outstanding on February 23, 2018 was 84,264,182.
Documents Incorporated by Reference:
Portions of the registrant’s proxy statement for the Company’s 2018 Annual Meeting of Shareholders are incorporated by reference in Item 5 of Part II and Items 10, 11, 12, 13, and 14 of Part III.


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TABLE OF CONTENTS
  
 
 
ITEM 1
  
 
 
ITEM 1A
  
ITEM 1B
  
ITEM 2
  
ITEM 3
  
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ITEM 5
  
ITEM 6
  
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ITEM 9A
  
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ITEM 10
  
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ITEM 15
  
ITEM 16
 
 
  
 
  
EXHIBITS
 
 
  
CERTIFICATIONS
 

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Certain statements contained in this Annual Report on Form 10-K that are not historical facts may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are intended to be covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve risks and uncertainties. These statements, which are based on certain assumptions and describe our future plans, strategies and expectations, can generally be identified by the use of the words “may,” “will,” “should,” “could,” “would,” “plan,” “potential,” “estimate,” “project,” “believe,” “intend,” “anticipate,” “expect,” “target” and similar expressions. These statements include, among others, statements regarding our strategy; the effectiveness of our investment programs; evaluations of future interest rate trends and liquidity; expectations as to growth in assets, deposits and results of operations, future operations, market position and financial position; and prospects, plans and objectives of management. You should not place undue reliance on our forward-looking statements. You should exercise caution in interpreting and relying on forward-looking statements because they are subject to significant risks, uncertainties and other factors which are, in some cases, beyond the Company’s control.
Forward-looking statements are based on the current assumptions and beliefs of management and are only expectations of future results. The Company’s actual results could differ materially from those projected in the forward-looking statements as a result of, among others, factors referenced herein under the section captioned “Risk Factors”; adverse conditions in the capital and debt markets and the impact of such conditions on the Company’s private banking, wealth management and trust, investment management and wealth advisory activities; changes in interest rates; competitive pressures from other financial institutions and non-banks; the effects of weakness in general economic conditions on a national basis or in the local markets in which the Company operates, including changes that adversely affect borrowers’ ability to service and repay our loans; changes in the value of securities in our investment portfolio; changes in loan default and charge-off rates; the adequacy of loan loss reserves; decreases in deposit levels necessitating increased borrowing to fund loans and investments; changes in government regulation; the risk that goodwill and intangibles recorded in the Company’s financial statements will become impaired; the risk that the Company’s deferred tax assets may not be realized; risks related to the identification and implementation of acquisitions, dispositions, and restructurings; and changes in assumptions used in making such forward-looking statements, as well as the other risks and uncertainties detailed in this Annual Report on Form 10-K and other filings submitted to the Securities and Exchange Commission. Forward-looking statements speak only as of the date on which they are made. The Company does not undertake any obligation to update any forward-looking statement to reflect circumstances or events that occur after the date the forward-looking statements are made.


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PART I

ITEM 1.     BUSINESS

I.General
Boston Private Financial Holdings, Inc. (the “Company,” “BPFH,” “we,” “us,” or “our”) was incorporated on September 2, 1987, under the laws of The Commonwealth of Massachusetts. On July 1, 1988, the Company registered with the Board of Governors of the Federal Reserve System (the “Federal Reserve”) as a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHCA”), and became the parent holding company (the “Holding Company”) of Boston Private Bank & Trust Company (the “Bank” or “Boston Private Bank”), a trust company chartered by The Commonwealth of Massachusetts and insured by the Federal Deposit Insurance Corporation (the “FDIC”).
We are a private banking and wealth management company that offers a full range of private banking and wealth management services to high net worth individuals, families, businesses, and select institutions through a financial umbrella that helps to preserve, grow, and transfer assets over the financial lifetime of a client through our four functional segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory. Each reportable segment reflects the services provided by the Company to a distinct segment of the wealth management market as described below.
Private Banking
The Private Banking segment has one affiliate, Boston Private Bank. The Private Banking segment primarily operates in three geographic markets: New England, the San Francisco Bay Area, and Southern California. The Private Banking segment is principally engaged in providing private banking services to high net worth individuals, privately-owned businesses and partnerships, and nonprofit organizations. In addition, the Private Banking segment is an active provider of financing for affordable housing, first-time homebuyers, economic development, social services, community revitalization and small businesses.
Wealth Management and Trust
The Wealth Management and Trust segment is comprised of Boston Private Wealth LLC (“Boston Private Wealth”), an independent registered investment adviser (“RIA”), which is a wholly-owned subsidiary of the Bank. This segment also includes the trust operations of Boston Private Bank. Boston Private Wealth was formed from the combination of the Bank’s wealth management business and those of Banyan Partners, LLC (“Banyan”), which the Bank acquired in the fourth quarter of 2014. The segment provides comprehensive wealth management solutions for high net worth individuals and families, including customized investment solutions, wealth planning, trust, and family office services. The Wealth Management and Trust segment operates in New England; South Florida; California; and Madison, Wisconsin.
Investment Management
The Investment Management segment currently has two affiliates: Dalton, Greiner, Hartman, Maher & Co., LLC (“DGHM”), and Anchor Capital Advisors LLC (“Anchor”), both of which are RIAs (together, DGHM and Anchor are referred to as the “Investment Managers”). The Investment Managers serve the needs of pension funds, endowments, trusts, foundations and select institutions, mutual funds and high net worth individuals and their families throughout the United States (“U.S.”) and abroad. The Investment Managers specialize in value-driven equity portfolios with products across the capitalization spectrum. The specific mix of products, services and clientele varies between affiliates. The Investment Managers are located in New England and New York, with one affiliate administrative office in South Florida.
In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that will result in Anchor being majority-owned by members of its management team. The transaction is expected to close in the first quarter of 2018. This transaction has been approved by the Company’s board of directors and is subject to obtaining client consents, Anchor raising debt financing, and customary closing conditions. Anchor’s assets and liabilities are classified as held for sale at December 31, 2017 which are included within other assets and other liabilities in the consolidated balance sheets, respectively.
Wealth Advisory
The Wealth Advisory segment has two affiliates: KLS Professional Advisors Group, LLC (“KLS”), and Bingham, Osborn & Scarborough, LLC (“BOS”), both of which are wealth management firms and RIAs (together, the “Wealth Advisors”). The Wealth Advisors provide comprehensive, planning-based financial strategies to high net worth individuals and their families, and nonprofit institutions. The services the firms offer include fee-only financial planning, tax planning, tax

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preparation, estate and insurance planning, retirement planning, charitable planning and intergenerational gifting and succession planning. The Wealth Advisors manage investments covering a wide range of asset classes for both taxable and tax-exempt portfolios. The Wealth Advisors are located in New York, Southern California, and Northern California.
Collectively, the Wealth Management and Trust, Investment Management, and Wealth Advisory segments are referred to as the “Wealth and Investment” businesses.
For revenue, net income, assets, and other financial information for each of the Company’s reportable segments, see Part II. Item 8. “Financial Statements and Supplementary Data - Note 20: Reportable Segments.”
The Company’s Internet address is www.bostonprivate.com. The Company makes available on or through its Internet website, without charge, its annual reports on Form 10-K, quarterly reports on Form 10-Q, and current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as soon as reasonably practicable after such reports are electronically filed with, or furnished to, the Securities and Exchange Commission (the “SEC”). The Company’s reports filed with, or furnished to, the SEC are also available at the SEC’s website at www.sec.gov. The quarterly earnings release conference call can also be accessed from the Company’s website. Press releases are also maintained on the Company’s website for one year. Information on our website is not incorporated by reference into this document and should not be considered part of this Report.

II.Acquisitions, Asset Sales, and Divestitures
In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that will result in Anchor being majority-owned by members of its management team. The Company will receive at closing approximately $32 million of cash and future revenue share payments that, at signing, had a net present value of approximately $15 million, subject to purchase price adjustments. The Company’s annual goodwill impairment test for Anchor resulted in a fourth quarter of 2017 goodwill impairment charge of $24.9 million. The Company also recorded a loss on sale of $1.3 million representing estimated closing costs upon completion of the sale. Income tax expense of approximately $11.4 million will be recorded at the time of the closing of the transaction as a result of a book to tax basis difference associated with nondeductible goodwill. The transaction is expected to close in the first quarter of 2018. The estimated loss on sale as well as the income tax expense could change depending upon the book value of Anchor at the time of closing. This transaction has been approved by the Company’s board of directors and is subject to obtaining client consents, Anchor raising debt financing, and customary closing conditions. The rationale for the sale is to focus the Company’s resources in businesses where we can offer holistic financial advice, along with integrated wealth management, trust, and private banking capabilities. Upon closing, this transaction will also generate additional capital for us to reinvest in a more focused Company.
In November 2016, the Bank sold two of its Southern California offices, one located in Granada Hills, CA and the other located in Burbank, CA, together with approximately $104 million of deposits. The rationale for the sale was to better position the Company’s resources within the Southern California market.
In October 2014, Boston Private Bank acquired Banyan. Banyan and the wealth management operations from Boston Private Bank were combined to form Boston Private Wealth, which now operates in the Wealth Management and Trust reportable segment of the Company along with the trust operations of Boston Private Bank. Boston Private Wealth is a wholly-owned subsidiary of Boston Private Bank.
In 2009, the Company divested its interest in Westfield Capital Management Company, LP, formerly known as Westfield Capital Management Company, LLC (“Westfield”). The Company retained a 12.5% share in Westfield’s revenues (up to an annual maximum of $11.6 million) through December 2017 subject to certain conditions. The Company defers gains related to these payments until determinable. Such revenue share payments are included in net income from discontinued operations in the consolidated statements of operations for the period in which the revenue is recognized. After the December 2017 payments are received in the first quarter of 2018, the Company will not receive additional net income from Westfield.
For further details relating to the Company’s divestitures, see Part II. Item 8. “Financial Statements and Supplementary Data - Note 3: Acquisitions, Asset Sales, and Divestitures.”


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III.    Competition
The Company operates in the highly competitive private banking and wealth management marketplaces. In the private banking industry, the Bank encounters competition from larger national and regional commercial banking organizations, savings banks, credit unions, and other financial institutions and non-bank financial service companies, which may offer lower interest rates on loans and higher interest rates on deposits. The Bank’s competitors also include major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. The financial services industry is also likely to become more competitive as further technological advances enable more companies to provide financial services, including through the Internet. These technological advances may diminish the importance of depository institutions and other financial intermediaries, among other industry sectors, in the transfer of funds among parties. To compete effectively, the Bank relies on local promotional activity, personal contacts by officers, directors, and employees, customized service, and the Bank’s reputation within the communities that it serves.
In the wealth management and trust industry, the Company competes with a wide variety of firms, including national and regional financial services firms, commercial banks and trust companies, mutual fund companies, investment advisory firms, stock brokerage firms, accounting firms, and law firms. There has also been a trend toward online internet financial services and financial services that are based on mobile applications or automated processes as clients increasingly seek to manage their investment portfolios digitally. This is leading to increased utilization of “robo” adviser platforms. The Company believes that the ability of its Wealth Management and Trust segment to compete effectively with other firms is dependent upon the quality and level of service, personal relationships, and investment performance.
The Company’s principal competitors with respect to investment management services are primarily commercial banks and trust companies, mutual fund companies, investment advisory firms, stock brokerage firms, other financial companies, online financial services companies, and law firms.  The Company has also faced competition in recent years from lower fee, passive investment strategies. Investment advisers that emphasize passive products have gained, and may continue to gain, market share from active managers like us, which could have a material impact on our business. The Company believes that its ability to compete effectively with other investment management firms is dependent upon its products, level of investment performance and client service, as well as the marketing and distribution of the investment products.
In the wealth advisory industry, the Company competes with a wide variety of firms, including national and regional financial services firms, accounting firms, trust companies, and law firms. As in the Wealth Management and Trust segment, the Wealth Advisory segment has seen a trend toward the utilization of online financial services and increased utilization of “robo” adviser platforms. The Company believes that the ability of its wealth advisory affiliates to compete effectively with other firms is dependent upon the quality and level of service, personal relationships, and investment performance.

IV.    Employees
At December 31, 2017, the Company had 925 employees. The Company’s employees are not subject to a collective bargaining agreement, and the Company believes its employee relations are good.

V.     Supervision and Regulation
The following discussion addresses elements of the regulatory framework applicable to bank holding companies and their subsidiaries. This regulatory framework is intended primarily to protect the safety and soundness of depository institutions, the federal deposit insurance system, and depositors, rather than the shareholders of a bank holding company such as the Company.
As a bank holding company, the Company is subject to regulation, supervision and examination by the Federal Reserve under the BHCA. The Company is also subject to examination and supervision by the Massachusetts Division of Banks (the “MDOB”) under Massachusetts law. As a Massachusetts-chartered trust company and Federal Reserve member bank, the Bank is subject to regulation, supervision and examination by the Massachusetts Commissioner of Banks (the “Commissioner”) and the Federal Reserve. The Bank’s California branches are also subject to regulation, supervision and examination by the California Department of Business Oversight Division of Financial Institutions (the “DFI”).
The Company’s Wealth Management and Trust, Investment Management, and Wealth Advisory segments are subject to extensive regulation by the SEC, the Financial Industry Regulatory Authority and state securities regulators.
The following is a summary of certain aspects of the various statutes and regulations applicable to the Company and its subsidiaries. This summary is not a comprehensive analysis of all applicable laws, and is qualified by reference to the full text of statutes and regulations referenced below.

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Regulation of the Company
The Company is subject to regulation, supervision and examination by the Federal Reserve, which has the authority, among other things, to order bank holding companies to cease and desist from unsafe or unsound banking practices; to assess civil money penalties; and to order termination of non-banking activities or termination of ownership and control of a non-banking subsidiary by a bank holding company.
Source of Strength. Under the BHCA, as amended by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), the Company is required to serve as a source of financial strength for the Bank. This support may be required at times when the Company may not have the resources to provide support to the Bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a bank subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.
Acquisitions and Activities. The BHCA prohibits a bank holding company, without prior approval of the Federal Reserve, from acquiring all or substantially all the assets of a bank; acquiring control of a bank; merging or consolidating with another bank holding company; or acquiring direct or indirect ownership or control of any voting shares of another bank or bank holding company if, after such acquisition, the acquiring bank holding company would control more than 5% of any class of the voting shares of such other bank or bank holding company.
The BHCA also prohibits a bank holding company from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks. However, a bank holding company may engage in and may own shares of companies engaged in certain activities that the Federal Reserve determines to be closely related to banking or managing and controlling banks.
Limitations on Acquisitions of Company Common Stock. The Change in Bank Control Act prohibits a person or group of persons from acquiring “control” of a bank holding company unless the Federal Reserve has been notified and has not objected to the transaction. Under a rebuttable presumption established by the Federal Reserve, the acquisition of 10% or more of a class of voting securities of a bank holding company with a class of securities registered under Section 12 of the Exchange Act would constitute the acquisition of control of a bank holding company.
In addition, the BHCA prohibits any company from acquiring control of a bank or bank holding company without first having obtained the approval of the Federal Reserve. Among other circumstances, under the BHCA, a company has control of a bank or bank holding company if the company owns, controls or holds with power to vote 25% or more of a class of voting securities of the bank or bank holding company; controls in any manner the election of a majority of directors or trustees of the bank or bank holding company; or the Federal Reserve has determined, after notice and opportunity for hearing, that the company has the power to exercise a controlling influence over the management or policies of the bank or bank holding company.
Regulation of the Bank
The Bank is subject to the regulation, supervision, and examination of the Commissioner and the Federal Reserve, and with respect to its California branches, the DFI. The Bank is also subject to regulations issued by the Bureau of Consumer Financial Protection, as enforced by the Federal Reserve. The Federal Reserve may also directly examine the other subsidiaries of the Company. The enforcement powers available to federal and state banking regulators include, among other things, the ability to issue cease and desist or removal orders, to terminate insurance of deposits, to assess civil money penalties, to issue directives to increase capital, to place the bank into receivership, and to initiate injunctive actions against banking organizations and institution-affiliated parties.
Deposit Insurance. Deposit obligations of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) up to $250,000 per separately insured depositor for deposits held in the same right and capacity. The Federal Deposit Insurance Act (the “FDIA”), as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to take steps as may be necessary to cause the ratio of deposit insurance reserves to estimated insured deposits - the designated reserve ratio - to reach 1.35% by September 30, 2020, and it mandates that the reserve ratio designated by the FDIC for any year thereafter may not be less than 1.35%. Further, the Dodd-Frank Act required that, in setting assessments, the FDIC offset the effect of the increase in the minimum reserve ratio from 1.15% to 1.35% on banks with less than $10 billion in assets. To satisfy these requirements, on March 15, 2016, the FDIC’s Board of Directors approved a final rule to increase the DIF’s reserve ratio to the statutorily required minimum ratio of 1.35% of estimated insured deposits. The final rule imposes on large banks a surcharge of 4.5 basis points of their assessment base, after making certain adjustments. Large banks, which are generally banks with $10 billion or more in assets, will pay quarterly surcharges in addition to their regular risk-based assessments. Overall regular risk-based assessment rates will decline once the reserve ratio reaches 1.15 percent. Small banks, such as the Bank, will receive credits to offset the portion of their assessments that help to raise the reserve ratio from 1.15

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percent to 1.35 percent. After the reserve ratio reaches 1.38 percent, the FDIC will automatically apply a small bank’s credits to reduce its regular assessment up to the entire amount of the assessment. The revised deposit insurance assessment pricing became effective on July 1, 2016.
Deposit premiums are based on assets. To determine its deposit insurance premium, the Bank computes the base amount of its average consolidated assets less its average tangible equity (defined as the amount of Tier 1 capital) and the applicable assessment rate. On April 26, 2016, the FDIC’s Board of Directors adopted a final rule that changed the manner in which deposit insurance assessment rates are calculated for established small banks, generally those banks with less than $10 billion of assets that have been insured for at least five years. Under this method, each of seven financial ratios and a weighted average of CAMELS composite ratings will be multiplied by a corresponding pricing multiplier. The sum of these products will be added to a uniform amount, with the resulting sum being an institution’s initial base assessment rate (subject to minimum or maximum assessment rates based on a bank’s CAMELS composite rating). This method takes into account various measures, including an institution’s leverage ratio, brokered deposit ratio, one year asset growth, the ratio of net income before taxes to total assets and considerations related to asset quality. Under the small bank pricing rule, beginning with the first assessment period after June 30, 2016, where the DIF’s reserve ratio has reached 1.15% assessments for established small banks with a CAMELS rating of 1 or 2 will range from 1.5 to 16 basis points after adjustments, while assessment rates for established small institutions with a CAMELS composite rating of 1 or 5 may range from 11 to 30 basis points, after adjustment. Assessments for established banks with a CAMELS rating of 3 will range from 3 to 30 basis points. The Company’s FDIC deposit insurance premium declined 32% in the first quarter that the new rules were enacted.
The FDIC has the power to adjust deposit insurance assessment rates at any time. In addition, under the FDIA, the FDIC may terminate deposit insurance upon a finding that the institution has engaged in unsafe and unsound practices; is in an unsafe or unsound condition to continue operations; or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. For 2017, the FDIC insurance expense for the Bank was $3.0 million.
Acquisitions and Branching. Prior approval from the Commissioner and the Federal Reserve is required in order for the Bank to acquire another bank or establish a new branch office. Well capitalized and well managed banks may acquire other banks in any state, subject to certain deposit concentration limits and other conditions, pursuant to the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994, as amended by the Dodd-Frank Act. In addition, the Dodd-Frank Act authorizes a state-chartered bank, such as the Bank, to establish new branches on an interstate basis to the same extent a bank chartered by the host state may establish branches.
Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA generally limits the types of equity investments that FDIC-insured state-chartered member banks, such as the Bank, may make and the kinds of activities in which such banks may engage, as a principal, to those that are permissible for national banks. Further, the Gramm-Leach-Bliley Act of 1999 (the “GLBA”) permits state banks, to the extent permitted under state law, to engage - through “financial subsidiaries” - in certain activities which are permissible for subsidiaries of a financial holding company. In order to form a financial subsidiary, a state-chartered bank must be well capitalized, and must comply with certain capital deduction, risk management and affiliate transaction rules, among other requirements. In addition, the Federal Reserve Act provides that state member banks are subject to the same restrictions with respect to purchasing, selling, underwriting and holding of investment securities as national banks.
Lending Restrictions. Federal law limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. The terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital. The Dodd-Frank Act explicitly provides that an extension of credit to an insider includes credit exposure arising from a derivatives transaction, repurchase agreement, reverse repurchase agreement, securities lending transaction or securities borrowing transaction. Additionally, the Dodd-Frank Act requires that asset sale transactions with insiders must be on market terms, and if the transaction represents more than 10% of the capital and surplus of the Bank, approved by a majority of the disinterested directors of the Bank.
Brokered Deposits. Section 29 of the FDIA and FDIC regulations generally limit the ability of an insured depository institution to accept, renew or roll over any brokered deposit unless the institution’s capital category is “well capitalized” or, with the FDIC’s approval, “adequately capitalized.” Depository institutions that have brokered deposits in excess of 10% of total assets will be subject to increased FDIC deposit insurance premium assessments. However, for institutions that are well capitalized and have a CAMELS composite rating of 1 or 2, reciprocal deposits are deducted from brokered deposits.

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Community Reinvestment Act. The Community Reinvestment Act (“CRA”) requires the Federal Reserve to evaluate the Bank’s performance in helping to meet the credit needs of the entire communities it serves, including low and moderate-income neighborhoods, consistent with its safe and sound banking operations, and to take this record into consideration when evaluating certain applications. The Federal Reserve’s CRA regulations are generally based upon objective criteria of the performance of institutions under three key assessment tests: (i) a lending test, to evaluate the institution’s record of making loans in its service areas; (ii) an investment test, to evaluate the institution’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and (iii) a service test, to evaluate the institution’s delivery of services through its branches, ATMs, and other offices. The Bank’s most recent performance evaluation from the FDIC, which was the Bank’s primary federal regulator at the time of the evaluation, was a “satisfactory” rating. Massachusetts has also enacted a similar statute that requires the Commissioner to evaluate the performance of the Bank in helping to meet the credit needs of its entire community and to take that record into account in considering certain applications.
Capital Adequacy and Safety and Soundness
Regulatory Capital Requirements. The Federal Reserve has issued risk-based and leverage capital rules applicable to U.S. banking organizations such as the Company and the Bank. These rules are intended to reflect the relationship between the banking organization’s capital and the degree of risk associated with its operations based on transactions recorded on-balance sheet as well as off-balance sheet. The Federal Reserve may from time to time require that a banking organization maintain capital above the minimum levels discussed below, due to the banking organization’s financial condition or actual or anticipated growth.
The capital adequacy guidelines define qualifying capital instruments and specify minimum amounts of capital as a percentage of assets that banking organizations are required to maintain. Common equity Tier 1 capital generally includes common stock and related surplus, retained earnings and, in certain cases and subject to certain limitations, minority interest in consolidated subsidiaries, less goodwill, other non-qualifying intangible assets and certain other deductions. Tier 1 capital for banks and bank holding companies generally consists of the sum of common equity Tier 1 capital, non-cumulative perpetual preferred stock, and related surplus, and, in certain cases and subject to limitations, minority interests in consolidated subsidiaries that do not qualify as common equity Tier 1 capital, less certain deductions. Tier 2 capital generally consists of hybrid capital instruments, perpetual debt and mandatory convertible debt securities, cumulative perpetual preferred stock, term subordinated debt and intermediate-term preferred stock, and, subject to limitations, allowances for loan losses. The sum of Tier 1 and Tier 2 capital less certain required deductions represents qualifying total risk-based capital. Prior to the effectiveness of certain provisions of the Dodd-Frank Act, bank holding companies were permitted to include trust preferred securities and cumulative perpetual preferred stock in Tier 1 capital, subject to limitations. However, the Federal Reserve’s capital rule applicable to bank holding companies permanently grandfathered non-qualifying capital instruments, including trust preferred securities, issued before May 19, 2010 by depository institution holding companies with less than $15 billion in total assets as of December 31, 2009, subject to a limit of 25% of Tier 1 capital. In addition, under rules that became effective January 1, 2015, accumulated other comprehensive income (positive or negative) must be reflected in Tier 1 capital; however, the Company and the Bank were permitted to make a one-time, permanent election to continue to exclude accumulated other comprehensive income from capital. The Company and the Bank have made this election.
Under the capital rules, risk-based capital ratios are calculated by dividing common equity Tier 1, Tier 1 risk-based capital, and total risk-based capital, respectively, by risk-weighted assets. Assets and off-balance sheet credit equivalents are assigned to one of several categories of risk-weights, based primarily on relative credit risk. The Tier 1 leverage ratio is calculated by dividing Tier 1 risk-based capital by average assets less certain items such as goodwill and intangible assets, as permitted under the capital rules.
Under the Federal Reserve’s capital rules applicable to the Company and the Bank, the Company and the Bank are each required to maintain a minimum common equity Tier 1 capital to risk-weighted assets ratio of 4.5%, a minimum total Tier 1 capital to risk-weighted assets ratio of 6.0%, a minimum total capital to risk-weighted assets ratio of 8% and a minimum leverage ratio of 4%. Additionally, subject to a transition schedule, these rules require an institution to establish a capital conservation buffer of common equity Tier 1 capital in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk weighted assets, or face restrictions on the ability to pay dividends, pay discretionary bonuses, and to engage in share repurchases.
Under the Federal Reserve’s rules, a Federal Reserve supervised institution, such as the Bank, is considered “well capitalized” if it (i) has a total risk-based capital ratio of 10.0% or greater; (ii) a Tier 1 risk-based capital ratio of 8.0% or greater; (iii) a common Tier 1 equity ratio of at least 6.5% or greater, (iv) a leverage capital ratio of 5.0% or greater; and (iv) is not subject to any written agreement, order, capital directive, or prompt corrective action directive to meet and maintain a

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specific capital level for any capital measure. The Bank is currently considered “well capitalized” under all regulatory definitions.
Generally, a bank, upon receiving notice that it is not adequately capitalized (i.e., that it is “undercapitalized”), becomes subject to the prompt corrective action provisions of Section 38 of FDIA that, for example, (i) restrict payment of capital distributions and management fees, (ii) require that its federal bank regulator monitor the condition of the institution and its efforts to restore its capital, (iii) require submission of a capital restoration plan, (iv) restrict the growth of the institution’s assets and (v) require prior regulatory approval of certain expansion proposals. A bank that is required to submit a capital restoration plan must concurrently submit a performance guarantee by each company that controls the bank. A bank that is “critically undercapitalized” (i.e., has a ratio of tangible equity to total assets that is equal to or less than 2.0%) will be subject to further restrictions, and generally will be placed in conservatorship or receivership within 90 days.
Current capital rules do not establish standards for determining whether a bank holding company is well capitalized. However, for purposes of processing regulatory applications and notices, the Federal Reserve Board’s Regulation Y provides that a bank holding company is considered “well capitalized” if (i) on a consolidated basis, the bank holding company maintains a total risk-based capital ratio of 10% or greater; (ii) on a consolidated basis, the bank holding company maintains a tier 1 risk-based capital ratio of 6% or greater; and (iii) the bank holding company is not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Board to meet and maintain a specific capital level for any capital measure.
Safety and Soundness Standards. The FDIA requires the federal bank regulatory agencies to prescribe standards, by regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, asset quality, earnings and compensation, fees and benefits. In general, these guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the federal banking agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order restricting asset growth, requiring an institution to increase its ratio of tangible equity to assets or directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “-Regulatory Capital Requirements” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.
Dividend Restrictions
The Company is a legal entity separate and distinct from the Bank and our other subsidiaries. The revenue of the Company (on a parent-only basis) is derived primarily from dividends paid to it by those other entities. The right of the Company, and consequently the right of shareholders of the Company, to participate in any distribution of the assets or earnings of the Bank and our other subsidiaries through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors) and our other subsidiaries, except to the extent that certain claims of the Company in a creditor capacity may be recognized.
Restrictions on Bank Holding Company Dividends. The Federal Reserve has the authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The Federal Reserve has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless the bank holding company’s net income over the preceding year is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organization’s capital needs, asset quality and overall financial condition. Further, under the Federal Reserve’s capital rule, the Company’s ability to pay dividends is restricted if it does not maintain capital above the conservation buffer. See “-Capital Adequacy and Safety and Soundness -Regulatory Capital Requirements” above.
Restrictions on Bank Dividends. The Federal Reserve has the authority to use its enforcement powers to prohibit a bank from paying dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. Federal law also prohibits the payment of dividends by a bank that will result in the bank failing to meet its applicable capital requirements on a pro forma basis. In addition, a state bank that is a member of the Federal Reserve System may not declare or

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pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the bank’s net income (as reportable in its Reports of Condition and Income) during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has not been objected to by the FRB following receipt of advance notice. A state member bank may not declare and pay a dividend that would exceed its individual profits (as reportable on its Reports of Condition and Income) unless it has provided advance notice to the Federal Reserve and the Federal Reserve has not objected. Payment of dividends by a bank is also restricted pursuant to various state regulatory limitations.
Certain Transactions by Bank Holding Companies with their Affiliates
There are various statutory restrictions on the extent to which bank holding companies and their non-bank subsidiaries may borrow, obtain credit from or otherwise engage in “covered transactions” with their insured depository institution subsidiaries. The Dodd-Frank Act amended the definition of affiliate to include an investment fund for which the depository institution or one of its affiliates is an investment adviser. An insured depository institution (and its subsidiaries) may not lend money to, or engage in covered transactions with, its non-depository institution affiliates if the aggregate amount of covered transactions outstanding involving the bank, plus the proposed transaction exceeds the following limits: (i) in the case of any one such affiliate, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 10% of the capital stock and surplus of the insured depository institution; and (ii) in the case of all affiliates, the aggregate amount of covered transactions of the insured depository institution and its subsidiaries cannot exceed 20% of the capital stock and surplus of the insured depository institution. For this purpose, “covered transactions” are defined by statute to include a loan or extension of credit to an affiliate; a purchase of or investment in securities issued by an affiliate; a purchase of assets from an affiliate unless exempted by the Federal Reserve; the acceptance of securities issued by an affiliate as collateral for a loan or extension of credit to any person or company; the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate; securities borrowing or lending transactions with an affiliate that creates a credit exposure to such affiliate; or a derivatives transaction with an affiliate that creates a credit exposure to such affiliate. Covered transactions are also subject to certain collateral security requirements. Covered transactions as well as other types of transactions between a bank and a bank holding company must be on market terms and not otherwise unduly favorable to the holding company or an affiliate of the holding company. Moreover, Section 106 of the BHCA provides that, to further competition, a bank holding company and its subsidiaries are prohibited from engaging in certain tying arrangements in connection with any extension of credit, lease or sale of property of any kind, or furnishing of any service.
Consumer Protection Regulation
The Company and the Bank are subject to federal and state laws designed to protect consumers and prohibit unfair, deceptive or abusive business practices, including the Equal Credit Opportunity Act, Fair Housing Act, Home Ownership Protection Act, Fair Credit Reporting Act, as amended by the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”), the GLBA, the Truth in Lending Act, the CRA, the Home Mortgage Disclosure Act, Real Estate Settlement Procedures Act, National Flood Insurance Act and various state law counterparts. These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with clients when taking deposits, making loans, collecting loans and providing other services. Further, the Dodd-Frank Act established the Consumer Financial Protection Bureau (“CFPB”), which has the responsibility for making rules and regulations under the federal consumer protection laws relating to financial products and services. The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms. Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties. The Federal Reserve will examine the Bank for compliance with CFPB rules and will enforce CFPB rules with respect to the Bank.
Mortgage Reform. The Dodd-Frank Act prescribes certain standards that mortgage lenders must consider before making a residential mortgage loan, including verifying a borrower’s ability to repay such mortgage loan, and allows borrowers to assert violations of certain provisions of the Truth in Lending Act as a defense to foreclosure proceedings. Under the Dodd-Frank Act, prepayment penalties are prohibited for certain mortgage transactions and creditors are prohibited from financing insurance policies in connection with a residential mortgage loan or home equity line of credit. In addition, the Dodd-Frank Act prohibits mortgage originators from receiving compensation based on the terms of residential mortgage loans and generally limits the ability of a mortgage originator to be compensated by others if compensation is received from a consumer. The Dodd-Frank Act requires mortgage lenders to make additional disclosures prior to the extension of credit, in each billing statement and for negative amortization loans and hybrid adjustable rate mortgages.
Privacy and Customer Information Security. The GLBA requires financial institutions to implement policies and procedures regarding the disclosure of nonpublic personal information about consumers to nonaffiliated third parties. In general, the Bank must provide its clients with an initial and annual disclosure that explains its policies and procedures

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regarding the disclosure of such nonpublic personal information, and, except as otherwise required or permitted by law, the Bank is prohibited from disclosing such information unless otherwise provided in such policies and procedures. However, an annual disclosure is not required to be provided by a financial institution if the financial institution only discloses information under exceptions from GLBA that do not require an opt out to be provided and if there has been no change in its privacy policies and practices since its most recent disclosure provided to consumers. The GLBA also requires that the Bank develop, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of client information (as defined under GLBA), to protect against anticipated threats or hazards to the security or integrity of such information and to protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any client. The Bank is also required to send a notice to clients whose “sensitive information” has been compromised if unauthorized use of the information is “reasonably possible.” Most states, including the states in which the Bank operates, have enacted legislation concerning breaches of data security and the duties of the Bank in response to a data breach. In addition, Massachusetts has promulgated data security regulations with respect to personal information of Massachusetts residents. Pursuant to the FACT Act, the Bank has developed and implemented a written identity theft prevention program to detect, prevent, and mitigate identity theft in connection with the opening of certain accounts or certain existing accounts. Additionally, the FACT Act amends the Fair Credit Reporting Act to generally prohibit a person from using information received from an affiliate to make a solicitation for marketing purposes to a consumer, unless the consumer is given notice and a reasonable opportunity and a reasonable and simple method to opt out of the making of such solicitations.
Anti-Money Laundering
The Bank Secrecy Act. Under the Bank Secrecy Act (“BSA”), a financial institution is required to have systems in place to detect certain transactions, based on the size and nature of the transaction. Financial institutions are generally required to report to the U.S. Treasury any cash transactions involving more than $10,000. In addition, financial institutions are required to file suspicious activity reports for any transaction or series of transactions that involve more than $5,000 and which the financial institution knows, suspects or has reason to suspect involves illegal funds, is designed to evade the requirements of the BSA or has no lawful purpose. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the “USA PATRIOT Act”), which amended the BSA, together with the implementing regulations of various federal regulatory agencies, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis. In evaluating an application under Section 3 of the BHCA to acquire a bank or an application under the Bank Merger Act to merge banks or effect a purchase of assets and assumption of deposits and other liabilities, the applicable federal banking regulator must consider the anti-money laundering compliance record of both the applicant and the target. In addition, under the USA PATRIOT Act, financial institutions are required to take steps to monitor their correspondent banking and private banking relationships as well as, if applicable, their relationships with “shell banks.”
OFAC. The U.S. has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These sanctions, which are administered by the U.S. Treasury’s Office of Foreign Assets Control (“OFAC”), take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial or other transactions relating to a sanctioned country, or with certain designated persons and entities; (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons); and (iii) restrictions on certain transactions with or involving certain persons or entities. Blocked assets (for example, property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the Company.
Regulation of Other Activities
Investment Management, Wealth Advisory, and Wealth Management and Trust. Certain subsidiaries of the Company are registered with the SEC as investment advisers under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Advisers Act imposes numerous obligations on RIAs, including fiduciary, recordkeeping, operational, and disclosure obligations. Certain Investment Management, Wealth Advisory, and Wealth Management and Trust subsidiaries of the Company are also subject to regulation under the securities laws and fiduciary laws of certain states.
The Dodd-Frank Act requires the SEC to study the standard of care for brokers and investment advisers and report its findings to Congress. Further, the Dodd-Frank Act permits the SEC to impose a uniform standard of care on brokers and investment advisers based on the study’s findings. Pursuant to the Dodd-Frank Act, the SEC must also harmonize the enforcement of fiduciary standard violations under the Exchange Act and the Advisers Act. It is unclear how the studies and

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rulemaking relating to the fiduciary duties of brokers and investment advisers will affect the Company and its Investment Management, Wealth Advisory, and Wealth Management and Trust subsidiaries.
Each of the mutual funds for which one or more of the Company’s Investment Management subsidiaries acts as sub-adviser is registered with the SEC under the Investment Company Act of 1940, as amended (the “1940 Act”). Shares of each such fund are registered with the SEC under the Securities Act, and the shares of each fund are qualified for sale (or exempt from such qualification) under the laws of each state and the District of Columbia to the extent such shares are sold in any of such jurisdictions.
The Company, the Bank, and their subsidiaries are also subject to the Employee Retirement Income Security Act of 1974 (“ERISA”), and to regulations promulgated thereunder, insofar as they are a “fiduciary” under ERISA with respect to certain of their clients. ERISA and the applicable provisions of the Internal Revenue Code of 1986, as amended (the “Code”), impose certain duties on persons who are fiduciaries under ERISA and prohibit certain transactions by the fiduciaries (and certain other related parties) to such plans.
As sub-advisers to registered investment companies, the Company’s Investment Management subsidiaries are subject to requirements under the 1940 Act and related SEC regulations. Under provisions of the 1940 Act and Advisers Act governing advisory contracts, an assignment terminating the Company’s sub-advisory contract can occur as a result of the acquisition of a firm by the Company.
The foregoing laws and regulations generally grant supervisory agencies and bodies broad administrative powers, including the power to limit or restrict certain subsidiaries of the Company from conducting their business in the event that they fail to comply with such laws and regulations. Possible sanctions that may be imposed in the event of such noncompliance include the suspension of individual employees; limitations on the business activities for specified periods of time; revocation of registration as an investment adviser, commodity trading adviser and/or other registrations; and other censures and fines.
Volcker Rule Restrictions on Proprietary Trading and Sponsorship of Hedge Funds and Private Equity Funds. The Dodd-Frank Act prohibits banking organizations, such as the Company, from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain circumstances, pursuant to a provision commonly referred to as the “Volcker Rule.” Under the Dodd-Frank Act, proprietary trading generally means trading by a banking entity or its affiliate for its trading account. Hedge funds and private equity funds are described by the Dodd-Frank Act as funds that would be registered under the 1940 Act but for certain enumerated exemptions. The Volcker Rule restrictions apply to the Company, the Bank, and all of their subsidiaries and affiliates.

VI.Taxation
Federal Taxation
The Company and its incorporated affiliates are subject to federal income taxation generally applicable to corporations under the Code. In addition, the Bank is subject to Subchapter H of the Code, which provides specific rules for the treatment of securities, reserves for loan losses, and any common trust funds.
The Company and its incorporated affiliates are members of an affiliated group of corporations within the meaning of Section 1504 of the Code and file a consolidated federal income tax return. Some of the advantages of filing a consolidated tax return include the avoidance of tax on intercompany distributions and the ability to offset operating and capital losses of one company against operating income and capital gains of another company.
The Company’s taxable income includes its share of the taxable income or loss from its subsidiaries that are limited liability companies.
On December 22, 2017, the Tax Cuts and Jobs Act, (the “Tax Act”) was enacted by the U.S. government. The Tax Act includes significant changes to the Code, including amendments which significantly change the taxation of business entities. The most significant change that impacts the Company is the reduction in the federal corporate tax rate from 35% to 21% and the elimination of Code Section 162(m)’s exemption for performance-based executive compensation, both of which are effective January 1, 2018.
State and Local Taxation
The Company and its affiliates are subject to the tax rate established in the states in which they do business. Substantially all of the Company’s taxable state and local income is derived from Massachusetts, California, Florida, New York, and the City of New York.

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The Massachusetts tax rate is 9.0% on taxable income apportioned to Massachusetts. Massachusetts’ taxable income is defined as federal taxable income subject to certain modifications. These modifications include a deduction for 95% of dividends received from entities in which the Company owns 15% or more of the voting stock, income from federally tax-exempt obligations and deductions for certain expenses allocated to federally tax-exempt obligations.
The California tax rate is 8.84% for corporations that are not financial institutions and 10.84% for financial institutions. The California tax is on California taxable income, which is defined as federal taxable income subject to certain modifications. These modifications include income from federally tax-exempt obligations and deductions for certain expenses allocated to federally tax-exempt obligations.
The Florida tax rate is 5.5% on taxable income apportioned to Florida. Florida’s taxable income is defined as federal taxable income subject to certain modifications. These modifications include income from federally tax-exempt obligations and deductions for certain expenses allocated to federally tax-exempt obligations.
The New York state tax rate is 6.5% on taxable income apportioned to New York (subject to alternative minimum taxes that may be based on business capital or a fixed dollar minimum), plus a surcharge for business operations in the Metropolitan Commuter Transportation district. New York taxable income is defined as federal taxable income subject to certain modifications. These modifications include income from federally tax-exempt obligations and deductions for certain expenses allocated to federally tax-exempt obligations. Combined reporting requirements began in 2015.
The New York City tax rate is 8.85% on taxable income apportioned to New York City (subject to alternative minimum taxes that may be based on business capital or a fixed dollar minimum). New York City taxable income is defined as federal taxable income subject to certain modifications. These modifications include income from federally tax-exempt obligations and deductions for certain expenses allocated to federally tax-exempt obligations. Combined reporting requirements began in 2015.

ITEM 1A.RISK FACTORS
Before deciding to invest in us or deciding to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this report and in our other filings with the SEC. The risks and uncertainties described below and in our other filings are not the only ones facing us. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. If any of these known or unknown risks or uncertainties actually occur, our business, financial condition and results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose some or all of your investment.
Risks Related to our Banking Business
Our banking business is highly regulated, which could limit or restrict our activities, and changes in banking laws and regulations could have an adverse effect on our business.
We are subject to regulation and supervision by the Federal Reserve, and the Bank is subject to regulation and supervision by the Commissioner, the Federal Reserve, and the FDIC. Federal and state laws and regulations govern numerous matters affecting us, including changes in the ownership or control of banks and bank holding companies; maintenance of adequate capital and the financial condition of a financial institution; permissible types, amounts and terms of extensions of credit and investments; permissible non-banking activities; the level of reserves against deposits; and restrictions on dividend payments. The Federal Reserve and the Commissioner have the power to issue cease and desist orders to prevent or remedy unsafe or unsound practices or violations of law by banks subject to their regulation, and the Federal Reserve possesses similar powers with respect to bank holding companies. These and other restrictions limit the manner in which we and the Bank may conduct business and obtain financing.
The laws, rules, regulations and supervisory guidance and policies applicable to us are subject to regular modification and change. These changes could adversely impact us. Such changes could subject us to additional costs, including costs of compliance, limit the types of financial services and products we may offer, and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations, policies, or supervisory guidance could result in enforcement and other legal actions by federal or state authorities, including criminal and civil penalties, the loss of FDIC insurance, revocation of a banking charter, other sanctions by regulatory agencies, civil money penalties, and/or reputational damage, which could have an adverse effect on our business, financial condition, and results of operations. See Part I. Item 1. “Business - Supervision and Regulation.”

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We are subject to capital and liquidity standards that require banks and bank holding companies to maintain more and higher quality capital and greater liquidity than has historically been the case.
We became subject to new capital requirements in 2015. These new standards, which now apply and are being fully phased-in over the next several years, require bank holding companies and their bank subsidiaries to maintain substantially higher levels of capital as a percentage of their assets, with a greater emphasis on common equity as opposed to other components of capital. The need to maintain more and higher quality capital, as well as greater liquidity, and generally increased regulatory scrutiny with respect to capital levels, may at some point limit our business activities, including lending, and our ability to grow our business. It could also result in our being required to take steps to increase our regulatory capital and may dilute shareholder value or limit our ability to pay dividends or otherwise return capital to our investors through stock repurchases.
We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act and fair lending laws, and any failure to comply with these laws could lead to a wide variety of sanctions.
The Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose community investment and nondiscriminatory lending requirements on financial institutions. The Consumer Financial Protection Bureau, the Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. A successful regulatory challenge to an institution’s performance under the Community Reinvestment Act, the Equal Credit Opportunity Act, the Fair Housing Act or other fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions, restrictions on expansion and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, reputation, financial condition, and results of operations.
The soundness of other financial institutions could adversely affect us.  
Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.  Financial services institutions are interrelated as a result of trading, clearing, counterparty and other relationships.  We have exposure to many different financial institutions, and we routinely execute transactions with counterparties in the financial industry, including brokers and dealers, other commercial banks, investment banks, mutual and hedge funds, and other financial institutions.  As a result, defaults by, or even negative rumors or questions about, one or more financial services institutions, or the financial services industry generally, could lead to market-wide liquidity problems and losses or defaults by us or by other institutions and organizations.  Many of these transactions expose us to credit risk in the event of default of our counterparty or client.  In addition, our credit risk may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at prices not sufficient to recover the full amount of the financial instrument exposure due to us.  There is no assurance that any such losses would not materially and adversely affect our results of operations.
Changes in the business and economic conditions, particularly those in our local economies, could negatively impact our financial condition and results of operations.
The Private Banking segment primarily serves individuals and smaller businesses located in three geographic regions: New England, the San Francisco Bay Area, and Southern California. The ability of the Bank’s clients to repay their loans is impacted by the economic conditions in these areas.
The Bank’s commercial loans are generally concentrated in the following client groups:
real estate developers and investors;
financial service providers;
technology companies;
manufacturing and communications companies;
professional service providers;
general commercial and industrial companies; and
individuals.
The Bank’s commercial loans, with limited exceptions, are secured by real estate (usually income producing residential and commercial properties), marketable securities, or corporate assets (usually accounts receivable, equipment or inventory). Substantially all of the Bank’s residential mortgage and home equity loans are secured by residential property. Consequently, the Bank’s ability to continue to originate real estate loans may be impaired by the weakening or deterioration in

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local and regional economic conditions in the real estate markets, including as a result of, among other things, real or threatened acts of war, natural disasters, and adverse weather. Due to the concentration of real estate collateral in the geographic regions in which we operate, these events could have an adverse impact on the ability of the Bank’s borrowers to repay their loans and affect the value of the collateral securing these loans.
Competition in the banking industry may impair our ability to attract and retain banking clients at current levels.
Competition in the markets in which the Bank operates may limit the ability of the Bank to attract and retain banking clients. The Bank’s competitors include several major financial companies whose greater resources may afford them a marketplace advantage by enabling them to maintain numerous banking locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions have larger lending limits and are able to serve the credit and investment needs of larger clients. The Bank also faces competition from out-of-state financial intermediaries that have opened low-end production offices or that solicit deposits in its respective market areas from other remote locations. There is also increased competition by out-of-market competitors through the Internet. Because the Bank maintains a smaller staff and has fewer financial and other resources than larger institutions with which it competes, it may be limited in its ability to attract clients. In addition, the Bank’s current commercial banking clients may seek alternative banking sources as they develop needs for credit facilities larger than the Bank can accommodate. If the Bank is unable to attract and retain banking clients, it may be unable to continue its deposit and loan growth and its results of operations and financial condition may otherwise be negatively impacted.
Market changes may adversely affect demand for the Bank’s services and impact results of operations.
Channels for servicing the Bank’s customers are evolving rapidly, with less reliance on traditional branch facilities, more use of online and mobile banking, and increased demand for universal bankers and other relationship managers who can service multiple product lines. The Bank competes with larger providers that are rapidly evolving their service offerings and escalating the costs of the Bank’s efforts to keep pace. The Bank has a process for evaluating the profitability of its branch system and other office and operational facilities. The identification of unprofitable operations and facilities can lead to restructuring charges and introduce the risk of disruptions to revenues and customer relationships.
Our cost of funds for banking operations may increase as a result of general economic conditions, interest rates and competitive pressures.
The Bank has traditionally obtained funds principally through deposits and borrowings. As a general matter, deposits are a cheaper source of funds than borrowings, because interest rates paid for deposits are typically less than interest rates charged for borrowings. We compete with banks and other financial institutions for deposits. If, as a result of general economic conditions, market interest rates, competitive pressures, or otherwise, the amount of deposits at the Bank decreases relative to its overall banking operations, the Bank may have to rely more heavily on higher cost borrowings as a source of funds in the future. Higher funding costs reduce our net interest margin, net interest income, and net income.
Potential downgrades of U.S. government securities by one or more of the credit ratings agencies could have an adverse effect on our operations, earnings and financial condition.
A possible future downgrade of the sovereign credit ratings of the U.S. government and a decline in the perceived creditworthiness of U.S. government-related obligations could impact our ability to obtain funding that is collateralized by these affected instruments held by us, as well as affect the pricing of that funding when it is available. A downgrade may also adversely affect the market value of such instruments held by us. We cannot predict if, when or how any changes to the credit ratings or perceived creditworthiness of these organizations will affect economic conditions. Such ratings actions could result in a significant adverse impact on us. Among other things, a downgrade in the U.S. government’s credit rating could adversely impact the value of our securities portfolio and may trigger requirements that the Company post additional collateral for trades relative to these securities. A downgrade of the sovereign credit ratings of the U.S. government or the credit ratings of related institutions, agencies or instruments would significantly exacerbate the other risks to which we are subject and any related adverse effects on our business, financial condition and results of operations.

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Defaults in the repayment of loans may require additional loan loss reserves and negatively impact our banking business.
A borrower’s default on its obligations under one or more Bank loans may result in lost principal and interest income and increased operating expenses as a result of the allocation of management time and resources to the collection and work-out of the loan. In certain situations, where collection efforts are unsuccessful or acceptable work-out arrangements cannot be reached, the Bank may have to charge-off the loan in whole or in part. In such situations, the Bank may acquire real estate or other assets, if any, which secure the loan through foreclosure or other similar available remedies. In such cases, the amount owed under the defaulted loan may exceed the value of the assets acquired.
On at lease a quarterly basis, the Bank’s management makes a determination of an allowance for loan losses based on available information, including the quality of its loan portfolio, certain economic conditions, the historical rate of defaulted loans, the value of the underlying collateral, and the level of its nonaccruing and criticized loans. We rely on our loan quality reviews, our experience and our evaluation of economic conditions, among other factors, in determining the level required for the allowance for loan losses. If management determines that further increases in the allowance for loan losses are necessary, we will incur additional expenses.
If it is determined that the Bank should sell certain loans or a portfolio of loans, we are required to classify those loans as “held for sale” which requires us to carry such loans at the lower of their amortized cost or market value. If we decide to sell loans at a time when the fair value of those loans is less than their carrying value, the adjustment will result in a charge to the allowance for loan losses if the decline in value is due to credit issues. We may from time to time decide to sell particular loans or groups of loans, and the required adjustment could negatively affect our financial condition or results of operations.
In addition, bank regulatory agencies periodically review the Bank’s allowance for loan losses and the values it attributes to real estate acquired through foreclosure or other similar remedies. Such regulatory agencies may require the Bank to adjust its determination of the value for these items. These adjustments could negatively impact our results of operations or financial condition.
Fluctuations in interest rates may negatively impact our banking business.
The Bank’s earnings and financial condition are largely dependent on net interest income, which represents the difference between the interest income earned on interest-bearing assets (usually loans and investment securities) and the interest expense incurred in connection with interest-bearing liabilities (usually deposits and borrowings). The relative rates of interest we earn and pay are highly sensitive to many factors beyond our control, including general economic conditions, and changes in monetary or fiscal policies of the Federal Reserve and other governmental authorities. A narrowing of this interest rate spread could adversely affect the Bank’s net interest income, which also could negatively impact its earnings and financial condition. As a result, the Bank has adopted asset and liability management policies to mitigate the potential adverse effects of changes in interest rates on net interest income, primarily by altering the mix and maturity of loans, investments, funding sources, and derivatives. However, even with these policies in place, a change in interest rates can impact our results of operations or financial condition.
An increase in interest rates could also have a negative impact on the Bank’s results of operations by reducing the ability of borrowers to repay their current floating loan obligations, which could not only result in increased loan defaults, foreclosures, and charge-offs, but also necessitate increases to our allowances for loan losses.
Similarly, rising interest rates may increase the cost of deposits, which are a primary source of funding. While we actively manage against these risks through hedging and other risk management strategies, if our assumptions regarding borrower behavior are wrong or overall economic conditions are significantly different than anticipated, our risk mitigation techniques may be insufficient.
A decrease in interest rates could also have a negative impact on the Bank’s results of operations if clients refinance their loans at lower rates or prepay their loans and we are unable to lend or invest those funds at equivalent or higher rates.
Prepayments of loans may negatively impact our banking business.
Generally, the Bank’s clients may prepay the principal amount of their outstanding loans at any time. The rate at which such prepayments occur, as well as the size of such prepayments, are within our clients’ discretion. Fluctuations in interest rates, in certain circumstances, may also lead to high levels of loan prepayments, which may also have an adverse impact on our net interest income. If clients prepay the principal amount of their loans, and we are unable to lend those funds to other borrowers or invest the funds at the same or higher interest rates, our interest income will be reduced. A significant reduction in interest income could have a negative impact on our results of operations and financial condition.

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Our loan portfolio includes commercial loans, commercial real estate loans, and construction and land loans, which are generally riskier than other types of loans.
At December 31, 2017, our commercial loans, commercial real estate loans, and construction and land loans portfolios comprised 54% of total loans. Commercial loans generally carry larger loan balances and involve a higher risk of nonpayment or late payment than residential mortgage loans. These loans may lack standardized terms and may include a balloon payment feature. The ability of a borrower to make or refinance a balloon payment may be affected by a number of factors, including the financial condition of the borrower, prevailing economic conditions, interest rates, and collateral values. Repayment of these loans is generally more dependent on the economy and the successful operation of the underlying business. Because of the risks associated with commercial loans, we may experience higher rates of default than if our loan portfolio were more heavily weighted toward residential mortgage loans. Higher rates of default could have an adverse effect on our financial condition and results of operations.
Environmental liability associated with commercial lending could result in losses.
In the course of business, the Bank may acquire, through foreclosure or other similar proceedings, properties securing loans it has originated or purchased which are in default. Particularly in commercial real estate lending, there is a risk that material environmental violations could be discovered at these properties. In this event, we or the Bank might be required to remedy these violations at the affected properties at our sole cost and expense. The cost of this remedial action could substantially exceed the value of affected properties. We may not have adequate remedies against the prior owner or other responsible parties and could find it difficult or impossible to sell the affected properties as a result of their condition. These events could have an adverse effect on our business, results of operations and financial condition.

Risks Related to our Investment Management, Wealth Advisory, and Wealth Management and Trust Businesses
Our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses are highly regulated, and the regulators have the ability to limit or restrict our activities and impose fines or suspensions on the conduct of our business.
Our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses are highly regulated, primarily at the federal level. The failure of any of our subsidiaries that provide investment management, wealth advisory, or wealth management and trust services to comply with applicable laws or regulations could result in fines, suspensions of individual employees or other sanctions including revocation of such affiliate’s registration as an investment adviser.
All of our Investment Management, Wealth Advisory, and Wealth Management and Trust affiliates are RIAs under the Advisers Act. The Advisers Act imposes numerous obligations on RIAs, including fiduciary, record keeping, operational and disclosure obligations. These subsidiaries, as investment advisers, are also subject to regulation under the federal and state securities laws and the fiduciary laws of certain states. In addition, the affiliates acting as sub-advisers to mutual funds are subject to certain provisions and regulations of the 1940 Act.
We are also subject to the provisions and regulations of ERISA to the extent that we act as a “fiduciary” under ERISA with respect to certain of our clients. ERISA and the applicable provisions of the federal tax laws, impose a number of duties on persons who are fiduciaries under ERISA and prohibit certain transactions involving the assets of each ERISA plan which is a client, as well as certain transactions by the fiduciaries (and certain other related parties) to such plans.
In addition, applicable law provides that all investment contracts with mutual fund clients may be terminated by the clients, without penalty, upon no more than 60 days’ notice. Investment contracts with institutional and other clients are typically terminable by the client, also without penalty, upon 30 days’ notice.
Changes in these laws or regulations could have an adverse impact on our profitability and mode of operations.

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Our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses may be negatively impacted by changes in economic and market conditions.
Our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses may be negatively impacted by changes in general economic and market conditions because the performance of such business is directly affected by conditions in the financial and securities markets. The financial markets and businesses operating in the securities industry are highly volatile (meaning that performance results can vary greatly within short periods of time) and are directly affected by, among other factors, domestic and foreign economic conditions and general trends in business and finance, all of which are beyond our control. We cannot assure you that broad market performance will be favorable in the future. Declines in the financial markets or a lack of sustained growth may result in a corresponding decline in our performance and may adversely affect the assets that we manage.
In addition, our management contracts generally provide for fees payable for investment management, wealth advisory, and wealth management and trust services based on the market value of assets under management, although there are a portion of our contracts that provide for the payment of fees based on investment performance in addition to a base fee. Because most contracts provide for a fee based on market values of securities, fluctuations in the underlying securities values may have an adverse effect on our results of operations and financial condition.
We may not be able to attract and retain investment management, wealth advisory, and wealth management and trust clients due to competition.
Due to intense competition, our Investment Management, Wealth Advisory, and Wealth Management and Trust subsidiaries may not be able to attract and retain clients. Competition is especially strong in our geographic market areas because there are numerous well-established, well-resourced, well-capitalized, and successful investment management, wealth advisory, and wealth management and trust firms in these areas.
Our ability to successfully attract and retain investment management, wealth advisory, and wealth management and trust clients is dependent upon our ability to compete with competitors’ investment products, level of investment performance, client services and marketing and distribution capabilities. If we are not successful, our results of operations and financial condition may be negatively impacted.
Investment management contracts are typically terminable upon less than 30 days’ notice. Most of our investment management clients may withdraw funds from accounts under management generally in their sole discretion. Wealth advisory client contracts must typically be renewed on an annual basis and are terminable upon relatively short notice. The combined financial performance of our Investment Management, Wealth Advisory, and Wealth Management and Trust affiliates is a significant factor in our overall results of operations and financial condition.
Our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses are highly dependent on investment managers to produce investment returns and to solicit and retain clients, and the loss of a key investment manager or wealth advisor could adversely affect our Investment Management, Wealth Advisory, and Wealth Management and Trust business.
We rely on our investment managers and wealth advisors to produce investment returns and to advise clients. We believe that investment performance is one of the most important factors for the growth of our assets under management. Poor investment performance could impair our revenues and growth because existing clients might withdraw funds in favor of better performing products, which would result in lower investment management fees, or our ability to attract funds from existing and new clients might diminish.
The market for investment managers is extremely competitive and is increasingly characterized by frequent movement of investment managers among different firms. In addition, our individual investment managers and wealth advisors often have regular direct contact with particular clients, which can lead to a strong client relationship based on the client’s trust in that individual manager or advisor. The loss of a key investment manager or wealth advisor could jeopardize our relationships with our clients and lead to the loss of client accounts. Losses of such accounts could have an adverse effect on our results of operations and financial condition.


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Risks Related to Our Overall Business and Operations
Our business and earnings have been adversely affected, and may in the future be adversely affected, by the U.S. and international financial markets and economic conditions.
The performance of our business has been and may in the future be adversely affected by general business and economic conditions in the U.S., including the level and volatility of short- and long-term interest rates, inflation, home prices, unemployment and under-employment levels, bankruptcies, household income, consumer spending, fluctuations in both debt and equity capital markets, liquidity of the global financial markets, the availability and cost of credit, and investor confidence. While in recent years there has been gradual improvement in the U.S. economy, deterioration of any of these conditions can adversely affect our results of operations and financial condition.
We may incur significant losses as a result of ineffective risk management processes and strategies.
We seek to monitor and control our risk exposure through a risk and control framework encompassing a variety of separate but complementary financial, credit, operational, compliance, and legal reporting systems; internal controls; management review processes; and other mechanisms. While we employ a broad and diversified set of risk monitoring and risk mitigation techniques, those techniques and the judgments that accompany their application may not be effective and may not anticipate every economic and financial outcome in all market environments or the specifics and timing of such outcomes. Market conditions over the last several years have involved unprecedented dislocations and highlight the limitations inherent in using historical data to manage risk.
We may be unable to attract and retain key employees.
Our success depends, in large part, on our ability to attract and retain key employees. Competition for the best people can be intense and we may not be able to hire or retain the key employees that we depend upon for success. The unexpected loss of services of one or more of our key employees could have an adverse impact on our business because of their skills, knowledge of the customers and the markets in which we operate, years of industry experience, and the difficulty of promptly finding qualified replacement employees.
Our ability to attract and retain clients and employees, and to maintain relationships with vendors, third-party service providers and others, could be adversely affected to the extent our reputation is harmed.
We are dependent on our reputation within our market area, as a trusted and responsible financial company, for all aspects of our relationships with clients, employees, vendors, third-party service providers, and others with whom we conduct business or potential future business. Our ability to attract and retain clients and employees at our Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory subsidiaries could be adversely affected to the extent our reputation is damaged. Our actual or perceived failure to address various issues could give rise to reputational risk that could cause harm to us and our business prospects. These issues include, but are not limited to, legal and regulatory requirements; privacy; properly maintaining client and employee personal information; record keeping; money-laundering; sales and trading practices; ethical issues; appropriately addressing potential conflicts of interest; and the proper identification and disclosure of the legal, reputational, credit, liquidity, and market risks inherent in our products. Failure to appropriately address any of these issues could also give rise to additional regulatory restrictions, reputational harm, and legal risks, which could, among other consequences, increase the size and number of litigation claims and damages asserted or subject us to enforcement actions, fines, and penalties and cause us to incur related costs and expenses. In addition, our Investment Management, Wealth Advisory, and Wealth Management and Trust businesses are dependent on the integrity of our asset managers and our employees. If an asset manager or employee were to misappropriate any client funds or client information, the reputation of our asset management business could be negatively affected, which may result in the loss of accounts and have an adverse effect on our results of operations and financial condition.
We may not be able to successfully implement future information technology system enhancements, which could adversely affect our business operations and profitability.
We invest significant resources in information technology system enhancements in order to provide functionality and security at an appropriate level. We may not be able to successfully implement and integrate future system enhancements, which could adversely impact the ability to provide timely and accurate financial information in compliance with legal and regulatory requirements and result in possible sanctions from regulatory authorities. Such sanctions could include fines and suspension of trading in our stock, among others. In addition, future system enhancements could have higher than expected costs, fail to achieve their intended operating efficiencies, and/or even result in operating inefficiencies, which could increase the costs associated with the implementation as well as ongoing operations.

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Failure to properly utilize system enhancements that are implemented in the future could result in impairment charges that adversely impact our financial condition and results of operations and could result in significant costs to remediate or replace the defective components. In addition, we may incur significant training, licensing, maintenance, consulting and amortization expenses during and after systems implementations, and any such costs may continue for an extended period of time.
We rely on other companies to provide key components of our business infrastructure.
Third-party vendors provide key components of our business infrastructure such as internet connections, network access and core application processing. While we have selected these third party vendors carefully, using established criteria and complying with applicable regulatory guidance to evaluate each vendor’s overall risk profile, capabilities, financial stability, and internal control environment, we do not control their daily business environment and actions. Any problems caused by these third parties, including as a result of their not providing us their services for any reason or their performing their services poorly, could adversely affect our ability to deliver products and services to our customers, impair our ability to conduct our business efficiently and effectively, and/or result in regulatory action, financial loss, litigation, and loss of reputation. Replacing these third party vendors could also entail significant delay and expense.
We face continuing and growing security risks to our information base, including the information we maintain relating to our customers.
In the ordinary course of business, we rely on electronic communications and information systems to conduct our business and to store sensitive data, including our confidential information and financial and personal information regarding customers. Our electronic communications and information systems infrastructure could be susceptible to cyberattacks, hacking, identity theft, computer viruses, malicious code, phishing attacks, terrorist activity or other information security breaches. This risk has increased significantly due to the use of online, telephonic and mobile banking channels by clients and the increased sophistication and activities of organized crime, hackers, terrorists and other external parties. We have implemented and regularly review and update extensive systems of internal controls and procedures as well as corporate governance policies and procedures intended to protect our business operations, including the security and privacy of all confidential customer information. In addition, we rely on the services of a variety of vendors to meet our data processing and communication needs. No matter how well designed or implemented our controls are, we cannot provide an absolute guarantee to protect our business operations from every type of problem in every situation. A failure or circumvention of these controls could have an adverse effect on our business operations and financial condition.
We regularly assess and test our security systems and disaster preparedness, including back-up systems, but the risks are substantially escalating. As a result, cybersecurity and the continued enhancement of our controls and processes to protect our systems, data and networks from attacks, unauthorized access or significant damage remain a priority. Accordingly, we may be required to expend additional resources to enhance our protective measures or to investigate and remediate any information security vulnerabilities or exposures. Any breach of our system security could result in disruption of our operations, unauthorized access to confidential customer information, violations of applicable privacy and other laws, significant regulatory costs, litigation exposure and other possible damages, loss or liability. Such costs or losses could exceed the amount of our available insurance coverage, if any, and would adversely affect our earnings. Also, any failure to prevent a security breach or to quickly and effectively deal with such a breach could negatively impact customer confidence, damaging our reputation and undermining our ability to attract and keep customers.
We are subject to extensive and expanding government regulation and supervision, which can lead to costly enforcement actions while increasing the cost of doing business and limiting our ability to generate revenue.
The financial services industry faces intense and ongoing scrutiny from bank supervisors in the examination process and aggressive enforcement of regulations on both the federal and state levels, particularly with respect to compliance with anti-money laundering, BSA and OFAC regulations, and economic sanctions against certain foreign countries and nationals. Enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. We maintain systems and procedures designed to ensure that we comply with applicable laws and regulations; however, some legal/regulatory frameworks provide for the imposition of fines or penalties for noncompliance even though the noncompliance was inadvertent or unintentional and even though there were systems and procedures designed to ensure compliance in place at the time. Failure to comply with these and other regulations, and supervisory expectations related thereto, may result in fines, penalties, lawsuits, regulatory sanctions, reputational damage, or restrictions on our business.

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We face significant legal risks, both from regulatory investigations and proceedings and from private actions brought against us.
From time to time we are named as a defendant or are otherwise involved in various legal proceedings, including class actions and other litigation or disputes with third parties. There is no assurance that litigation with private parties will not increase in the future. Future actions against us may result in judgments, settlements, fines, penalties or other results adverse to us, which could adversely affect our business, financial condition or results of operations, or cause serious reputational harm to us. As a participant in the financial services industry, it is likely that we could experience a high level of litigation related to our businesses and operations.
To the extent that we acquire or seek to acquire other companies in the future, our business may be negatively impacted by certain risks inherent in such acquisitions.
We continue to consider the acquisition of other private banking, wealth management and trust, investment management, and wealth advisory companies as well as companies with other potential capabilities in the financial services industry. To the extent that we acquire or seek to acquire other companies in the future, our business may be negatively impacted by certain risks inherent in such acquisitions. These risks include, but are not limited to, the following:
the risk that we will incur substantial expenses in pursuing potential acquisitions without completing such acquisitions;
the risk that we may lose key clients or employees of the acquired business as a result of the change of ownership to us;
the risk that the acquired business will not perform in accordance with our expectations;
the risk that difficulties will arise in connection with the integration of the operations of the acquired business with our existing businesses;
the risk that we will need to make significant investments in infrastructure, controls, staff, emergency backup facilities or other critical business functions that become strained by our growth;
the risk that management may divert its attention from other aspects of our business;
the risk that unanticipated costs relating to potential acquisitions could reduce our earnings per share;
the risk associated with entering into geographic and product markets in which we have limited or no direct prior experience;
the risk that we may assume potential and unknown liabilities of the acquired company as a result of the acquisition; and
the risk that an acquisition will dilute our earnings per share, in both the short and long term, or that it will reduce our regulatory and tangible capital ratios.
As a result of these risks, any given acquisition, if and when consummated, may adversely affect our results of operations or financial condition. In addition, because the consideration for an acquisition may involve cash, debt or the issuance of shares of our stock and may involve the payment of a premium over book and market values, existing stockholders may experience dilution in connection with any acquisition.
Natural disasters, acts of terrorism and other external events could harm our business.
Natural disasters can disrupt our operations, result in damage to our properties, reduce or destroy the value of the collateral for our loans and negatively affect the economies in which we operate, which could have an adverse effect on our results of operations and financial condition. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have an adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. While we have established and regularly test disaster recovery procedures, the occurrence of any such event could have an adverse effect on our business, operations and financial condition.


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Risks Related to Accounting and Accounting Changes
Our financial statements are based in part on assumptions and estimates, which, if wrong, could cause unexpected losses in the future.
Pursuant to accounting principles generally accepted in the U.S. (“GAAP”), we are required to use certain assumptions and estimates in preparing our financial statements, including in determining loan loss reserves, reserves related to litigation, if any, and the fair value of certain assets and liabilities, among other items. If assumptions or estimates underlying our financial statements are incorrect, we may experience material fluctuations in our results of operations. For additional information, see Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies.”
Changes in accounting standards can be difficult to predict and can materially impact how we record and report our financial condition and results of operations.
Our accounting policies and methods are fundamental to how we record and report our financial condition and results of operations. From time to time, the Financial Accounting Standards Board changes the financial accounting and reporting standards that govern the preparation of our financial statements. These changes can be hard to anticipate and implement and can materially impact how we record and report our financial condition and results of operations.
Goodwill and other intangible asset impairment would negatively affect our financial condition and results of operations.
Generally, the acquirer in a business combination is willing to pay more for a business than the sum of the fair values of the individual assets and liabilities because of other inherent value associated with an assembled business. The resulting excess of the consideration paid over the net fair value of the identifiable assets acquired and liabilities assumed as of the date of acquisition, is recognized as goodwill. An essential part of the acquisition method is the recognition and measurement of identifiable intangible assets, separate from goodwill, at fair value. At December 31, 2017, our goodwill and net intangible assets totaled $91.7 million, not including Anchor’s remaining goodwill and intangible assets of $47.1 million which are classified as held for sale and included within other assets in the consolidated balance sheets.
Under current accounting standards, goodwill acquired in a business combination is recognized as an asset and not amortized. Instead, goodwill is tested for impairment on an annual basis, or more frequently if there is a triggering event that may indicate the possibility of impairment. Long-lived intangible assets are amortized and are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of the asset or asset group may not be recoverable.
If we determine goodwill or intangible assets are impaired, we will be required to write down the value of these assets. In the fourth quarter of 2017, we incurred a $24.9 million goodwill impairment charge at Anchor as part of our annual impairment testing. In December 2016, we incurred a $9.5 million goodwill impairment charge at Boston Private Wealth as part of our annual impairment testing. We cannot assure you that we will not be required to take further impairment charges in the future. Any impairment charge would have a negative effect on our shareholders’ equity and financial results.
Net outflows of assets under management at Anchor and Boston Private Wealth in recent years have negatively impacted their financial results. In addition, any decline in the U.S. equity markets would have a further negative impact on assets under management at these firms. In addition to current financial results, other information such as forecasted earnings and market comparisons for these types of firms is used to determine the fair value of these firms and whether there is indication of impairment.
In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity assesses relevant events and circumstances, such as the following:
Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, or other developments in equity and credit markets.
Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (considered in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development.
Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods. 

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Other relevant entity-specific events, such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation.  
Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. 
Material negative changes in the assumptions or inputs in to the valuation models will increase the risk of impairment. The Company will continue to monitor the events and circumstances at Anchor, Boston Private Wealth, and its other subsidiaries with goodwill and/or intangibles for indication of a triggering event that would necessitate impairment testing prior to the usual testing in the fourth quarter.
Changes in tax law and differences in interpretation of tax laws and regulations may adversely impact our financial statements.
From time to time, local, state or federal tax authorities change tax laws and regulations, which may result in a decrease or increase to our deferred tax asset. At December 31, 2017, our net deferred tax asset was $29.0 million, reflecting a decrease of $12.5 million in connection with the enactment of the Tax Act. We assess the likelihood that our deferred tax asset will be realizable based primarily on future taxable income and, if necessary, establish a valuation allowance for those deferred tax assets determined to not likely be realizable. Management judgment is required in determining the appropriate recognition of deferred tax assets and liabilities, including projections of future taxable income, as well as the character of that income.
Local, state or federal tax authorities may interpret tax laws and regulations differently than we do and challenge tax positions that we have taken on tax returns. This may result in differences in the treatment of revenues, deductions, credits and/or differences in the timing of these items. The differences in treatment may result in payment of additional taxes, interest or penalties that could have an adverse effect on our results.

Risks Related to Our Liquidity
We are a holding company and depend on our subsidiaries for dividends.
We are a legal entity that is separate and distinct from the Bank and our other subsidiaries and depend on dividends from those entities to fund dividend payments on our common and preferred stock, to fund share repurchases, and to fund all payments on our other obligations. Our revenue (on a parent-only basis) is derived primarily from dividends paid to us by the Bank and our other subsidiaries. Our right, and consequently the right of our shareholders, to participate in any distribution of the assets or earnings of the Bank and our other subsidiaries through the payment of such dividends or otherwise is necessarily subject to the prior claims of creditors of the Bank (including depositors) and our other subsidiaries, except to the extent that certain claims of ours in a creditor capacity may be recognized.
Holders of our common stock are entitled to receive dividends only when, as, and if declared by our board of directors. Although we have historically declared cash dividends on our common and preferred stock, we are not required to do so. Our board of directors may reduce or eliminate our common stock dividend in the future. Further, if we do not pay dividends on our preferred stock, we may not pay any dividends on our common stock. The Federal Reserve has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. Additionally, the Federal Reserve has the authority to use its enforcement powers to prohibit the Bank from paying us dividends if, in its opinion, the payment of dividends would constitute an unsafe or unsound practice. The current capital regulations require banks and bank holding companies to maintain a 2.5% common equity Tier 1 capital conservation buffer above the minimum risk-based capital requirements for adequately capitalized institutions to avoid restrictions on the ability to pay dividends, discretionary bonuses, and to engage in share repurchases. The Company and the Bank met these requirements as of December 31, 2017. A reduction or elimination of dividends could adversely affect the market price of our common stock. See Part I. Item 1. “Business - Supervision and Regulation - Dividend Restrictions” and “Business - Supervision and Regulation - Regulatory Capital Requirements.”


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Risks Related to Our Common Stock
Future capital offerings may adversely affect the market price of our common stock.
In the future, we may attempt to increase our capital resources or, if our or the Bank’s capital ratios fall below required minimums, we or the Bank could be required to raise additional capital by making additional offerings of debt, common or preferred stock, or senior or subordinated notes. Upon liquidation, holders of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our available assets prior to the holders of our common stock.
Additional future equity offerings may dilute the holdings of our existing shareholders or reduce the market price of our common stock, or both. Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings.
We cannot assure you that such capital will be available to us on acceptable terms or at all. Our inability to raise sufficient additional capital on acceptable terms when needed could adversely affect our businesses, financial condition, and results of operations.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and cause significant price variations to occur. We cannot assure you that the market price of our common stock will not fluctuate or decline significantly in the future. Some of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common stock include:
quarterly variations in our operating results or the quality of our assets;
operating results that vary from the expectations of management, securities analysts, and investors;
changes in expectations as to our future financial performance;
announcements of innovations, new products, strategic developments, significant contracts, litigation, acquisitions, and other material events by us or our competitors;
the operating and securities price performance of other companies that investors believe are comparable to us;
our past and future dividend and share repurchase practices;
future sales of our equity or equity-related securities; and
changes in global financial markets and global economies and general market conditions, such as interest rates, stock, commodity or real estate valuations or volatility.
Anti-takeover provisions could negatively impact our shareholders.
Provisions of Massachusetts law, the BHCA, and provisions of our articles of organization and by-laws could make it more difficult for a third party to acquire control of us or have the effect of discouraging a third party from attempting to acquire control of us. Our articles of organization authorize our board of directors to issue preferred stock without shareholder approval and such preferred stock could be issued as a defensive measure in response to a takeover proposal. These and other provisions could make it more difficult for a third party to acquire us, even if an acquisition might be in the best interest of our shareholders.

ITEM 1B.UNRESOLVED STAFF COMMENTS
None.

ITEM 2.PROPERTIES
The Company and its subsidiaries primarily conduct operations in leased premises; however, the Bank owns the building in which one of its offices is located. The Bank leases the land upon which this building is located. The Company’s headquarters is located at Ten Post Office Square, Boston, Massachusetts. The premises for our Wealth and Investment affiliates are generally located in the vicinity of the headquarters of such affiliates. See “Private Banking,” “Wealth Management and Trust,” “Investment Management,” and “Wealth Advisory” in Part I. Item 1. “Business - General” for further detail.
Generally, the initial terms of the leases for our leased properties range from five to fifteen years. Most of the leases also include options to renew at fair market value for periods of five to ten years. In addition to minimum rentals, certain leases

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include escalation clauses based upon various price indices and include provisions for additional payments to cover real estate taxes.

ITEM 3.LEGAL PROCEEDINGS
The Company is involved in routine legal proceedings occurring in the ordinary course of business. In the opinion of management, final disposition of these proceedings will not have a material adverse effect on the consolidated balance sheets or consolidated statements of operations of the Company.

ITEM 4.MINE SAFETY DISCLOSURES
Not applicable.

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PART II

ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

I.Market for Common Stock
The Company’s common stock, par value $1.00 per share, is traded on the NASDAQ Global Select Market (“NASDAQ”) under the symbol “BPFH.” At February 23, 2018, there were 84,264,182 shares of common stock outstanding. The number of holders of record of the Company’s common stock as of February 23, 2018 was 934. The closing price of the Company’s common stock on February 23, 2018 was $15.10.
The following table sets forth the high and low sale prices for the Company’s common stock for the periods indicated, as reported by NASDAQ:
 
High
 
Low
Year ended December 31, 2017
 
 
 
Fourth Quarter
$17.15
 
$14.80
Third Quarter
$16.75
 
$13.95
Second Quarter
$17.20
 
$14.25
First Quarter
$17.88
 
$15.20
Year ended December 31, 2016
 
 
 
Fourth Quarter
$16.90
 
$12.45
Third Quarter
$13.02
 
$11.20
Second Quarter
$12.81
 
$10.77
First Quarter
$11.62
 
$9.34

II.Dividends
The Company paid dividends on its common stock of $0.44 and $0.40 in 2017 and 2016, respectively. On January 17, 2018, the Company announced an increase in its quarterly dividend from $0.11 per share to $0.12 per share for the fourth quarter of 2017.
The Company is a legal entity separate and distinct from its subsidiaries. These subsidiaries are the principal assets of the Company and, as such, provide the main source of payment of dividends by the Company. See Part I. Item 1. “Business - Supervision and Regulation - Dividend Restrictions,” which is incorporated by reference herein, for a discussion of statutory restrictions on the payment of dividends by the Company and the Bank. The payment of dividends by the Company and the Bank may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. There are no such comparable statutory restrictions on the Company’s Investment Managers’ and Wealth Advisors’ ability to pay dividends.

III.Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding securities authorized for issuance under our equity compensation plans will be included in the definitive Proxy Statement (the “Proxy Statement”) for the 2018 Annual Meeting of Shareholders to be held on April 19, 2018 and is incorporated herein by reference.

IV.Recent Sales of Unregistered Securities
None.

V.Issuer Repurchases
The Company received a notice of non-objection from the Federal Reserve for a share repurchase program of up to $20 million of the Company’s outstanding common shares. Under the program, shares may be repurchased from time to time in the open market for a two-year period. The Company’s board of directors approved the program on January 27, 2016.

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There were no shares repurchased under this program in 2017. The current repurchase program expired on February 22, 2018.

VI.Performance Graph
The Total Return Performance Graph set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Company’s common stock, based on the market price of the Company’s common stock, with the total return on companies within the NASDAQ Composite Index and companies within the SNL $5B-$10B Bank Index. The calculation of cumulative return assumes a $100 investment in the Company’s common stock, the NASDAQ Composite Index, and the SNL $5B-$10B Bank Index on December 31, 2012. It also assumes that all dividends are reinvested during the relevant periods.
392387057_chart-5f39349e177e54328b5.jpg
___________
Source: SNL
 
Year Ending December 31,
 
2012
 
2013
 
2014
 
2015
 
2016
 
2017
BPFH
$
100.00

 
$
143.33

 
$
156.98

 
$
136.17

 
$
205.70

 
$
197.47

NASDAQ Composite Index
100.00

 
140.12

 
160.78

 
171.97

 
187.22

 
242.71

SNL Bank $5B-$10B
100.00

 
154.28

 
158.92

 
181.04

 
259.37

 
258.40


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ITEM 6.SELECTED FINANCIAL DATA
The following table represents selected financial data for the last five fiscal years ended December 31, 2017. The data set forth below does not purport to be complete. It should be read in conjunction with, and is qualified in its entirety by, the more detailed information appearing elsewhere herein, including the Company’s Consolidated Financial Statements and related notes.
 
2017
 
2016
 
2015
 
2014
 
2013
At December 31:
 
 
(In thousands, except share data)
 
 
Total balance sheet assets
$
8,311,744

 
$
7,970,474

 
$
7,542,508

 
$
6,797,874

 
$
6,437,109

Loans held for sale
4,697

 
3,464

 
8,072

 
7,099

 
6,123

Total loans (excluding loans held for sale)
6,505,028

 
6,114,354

 
5,719,212

 
5,269,936

 
5,112,459

Allowance for loan losses
74,742

 
78,077

 
78,500

 
75,838

 
76,371

Cash and investments (1)
1,425,418

 
1,507,845

 
1,474,737

 
1,175,610

 
1,034,236

Goodwill and intangible assets
91,681

 
169,279

 
185,089

 
191,800

 
130,784

Deposits
6,510,246

 
6,085,146

 
6,040,437

 
5,453,879

 
5,110,370

Borrowed funds
862,213

 
980,192

 
625,902

 
507,009

 
575,970

Total shareholders’ equity
785,944

 
768,481

 
746,613

 
703,911

 
633,688

Nonperforming assets
14,295

 
19,005

 
27,347

 
45,111

 
45,538

Net loans (charged-off)/ recovered
4,334

 
6,512

 
4,217

 
5,867

 
2,314

Assets under management and advisory:
 
 
 
 
 
 
 
 
 
Wealth Management and Trust
$
7,865,000

 
$
7,008,000

 
$
7,976,000

 
$
9,274,000

 
$
4,565,000

Investment Management
2,004,000

 
1,803,000

 
1,841,000

 
2,022,000

 
1,894,000

Wealth Advisory
11,350,000

 
9,989,000

 
9,688,000

 
9,883,000

 
9,336,000

Inter-company relationships
(11,000
)
 
(11,000
)
 
(21,000
)
 
(22,000
)
 
(22,000
)
Total assets under management and advisory
$
21,208,000

 
$
18,789,000

 
$
19,484,000

 
$
21,157,000

 
$
15,773,000

Assets under management and advisory at Anchor
9,277,000

 
8,768,000

 
8,111,000

 
8,750,000

 
8,507,000

Total assets under management and advisory, including Anchor
$
30,485,000

 
$
27,557,000

 
$
27,595,000

 
$
29,907,000

 
$
24,280,000

For The Year Ended December 31:
 
 
 
 
 
 
 
 
 
Net interest income
$
224,686

 
$
200,438

 
$
185,770

 
$
179,701

 
$
174,018

Provision/ (credit) for loan losses
(7,669
)
 
(6,935
)
 
(1,555
)
 
(6,400
)
 
(10,000
)
Net interest income after provision/ (credit) for loan losses
232,355

 
207,373

 
187,325

 
186,101

 
184,018

Fees and other income
153,966

 
158,787

 
161,169

 
140,798

 
136,341

Operating expense excluding restructuring and impairment of goodwill
275,035

 
253,408

 
251,457

 
226,390

 
220,705

Restructuring expense

 
2,017

 
3,724

 
739

 

Impairment of goodwill
24,901

 
9,528

 

 

 

Income from continuing operations before income taxes
86,385

 
101,207

 
93,313

 
99,770

 
99,654

Income tax expense (2)
46,196

 
30,963

 
30,392

 
32,365

 
32,963

Net income from continuing operations
40,189

 
70,244

 
62,921

 
67,405

 
66,691

Net income from discontinued operations
4,870

 
5,541

 
6,411

 
6,160

 
7,792

Less: Net income attributable to noncontrolling interests
4,468

 
4,157

 
4,407

 
4,750

 
3,948

Net income attributable to the Company
$
40,591

 
$
71,628

 
$
64,925

 
$
68,815

 
$
70,535

(Continued)
 
 
 
 
 
 
 
 
 

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2017
 
2016
 
2015
 
2014
 
2013
At December 31:
 
 
(In thousands, except share data)
 
 
Per Share Data:
 
 
 
 
 
 
 
 
 
Total diluted earnings per share
$
0.42

 
$
0.81

 
$
0.74

 
$
0.80

 
$
0.68

Diluted earnings per share from continuing operations
$
0.36

 
$
0.74

 
$
0.66

 
$
0.72

 
$
0.59

Weighted average basic common shares outstanding
82,430,633

 
81,264,273

 
80,885,253

 
78,921,480

 
77,373,817

Weighted average diluted common shares outstanding
84,802,565

 
83,209,126

 
83,393,090

 
81,308,144

 
78,753,524

Cash dividends per share
$
0.44

 
$
0.40

 
$
0.36

 
$
0.32

 
$
0.24

Book value per share (3)
$
8.77

 
$
8.61

 
$
8.38

 
$
7.91

 
$
7.34

Selected Operating Ratios:
 
 
 
 
 
 
 
 
 
Return on average assets, as adjusted (non-GAAP) (4)
0.97
%
 
1.02
%
 
0.95
%
 
1.05
%
 
1.13
%
Return on average common equity, as adjusted (non-GAAP) (4)
10.13
%
 
10.22
%
 
9.37
%
 
10.64
%
 
11.73
%
Return on average tangible common equity, as adjusted (non-GAAP) (4)
13.60
%
 
14.43
%
 
13.83
%
 
14.56
%
 
15.83
%
Efficiency ratio, FTE Basis (non-GAAP) (5)
69.06
%
 
66.91
%
 
68.37
%
 
67.19
%
 
67.90
%
Net interest margin (6)
3.04
%
 
2.93
%
 
2.92
%
 
2.98
%
 
3.05
%
Total fees and other income/ total revenue (7)
40.66
%
 
44.20
%
 
46.45
%
 
43.93
%
 
43.93
%
Asset Quality Ratios:
 
 
 
 
 
 
 
 
 
Nonaccrual loans (excluding loans held for sale) to total loans (excluding loans held for sale)
0.22
%
 
0.28
%
 
0.46
%
 
0.84
%
 
0.88
%
Nonperforming assets to total assets
0.17
%
 
0.24
%
 
0.36
%
 
0.66
%
 
0.71
%
Allowance for loan losses to total loans (excluding loans held for sale)
1.15
%
 
1.28
%
 
1.37
%
 
1.44
%
 
1.49
%
Allowance for loan losses to nonaccrual loans (excluding loans held for sale)
5.23

 
4.51

 
2.95

 
1.72

 
1.71

Other Ratios:
 
 
 
 
 
 
 
 
 
Dividend payout ratio
105
%
 
49
%
 
49
%
 
40
%
 
35
%
Total equity to total assets ratio
9.46
%
 
9.64
%
 
9.90
%
 
10.35
%
 
9.84
%
Tangible common equity to tangible assets ratio (non-GAAP) (8)
7.33
%
 
7.07
%
 
6.98
%
 
7.03
%
 
7.22
%
Tier 1 common equity/ risk weighted assets (8)
10.32
%
 
10.00
%
 
9.80
%
 
9.24
%
 
9.93
%
____________
(1)
Cash and investments includes the following line items from the consolidated balance sheets: cash and cash equivalents, investment securities, and stock in Federal Home Loan Bank and Federal Reserve Bank.
(2)
The Company’s income tax expense was higher in 2017 than in prior years primarily due to the the impact of the Tax Act that was enacted on December 22, 2017. Among the significant changes to the Code, the Tax Act reduces the federal corporate tax rate from 35% to 21% effective January 1, 2018. The Company re-measured its deferred tax assets and liabilities at the lower federal corporate tax rate of 21% and recorded the additional tax expense impact in the fourth quarter of 2017, the period in which the Tax Act was enacted.
(3)
Book value per share is calculated by reducing the Company’s total equity by the preferred stock balance, then dividing that value by the total common shares outstanding as of the end of that period.
(4)
The Company uses certain non-GAAP financial measures, such as the Return on Average Common Equity ratio and the Return on Average Tangible Common Equity ratio, to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector.
The Company calculates Average Common Equity by adjusting Average Equity to exclude Average Non-convertible Preferred Equity. When Average Non-convertible Preferred Equity is excluded, the Company also reduces Net Income Attributable to the Company by dividends paid on that preferred equity.
The Company calculates Average Tangible Common Equity by adjusting Average Equity to exclude Average Non-convertible Preferred Equity and Average Goodwill and Intangible Assets, net. When Average Non-convertible Preferred Equity and Average Goodwill and Intangible Assets, net are excluded, the Company also reduces Net Income Attributable to the Company by dividends paid on that preferred equity and adds back amortization of intangibles, net of tax.

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Reconciliations from the Company’s GAAP Return on Average Equity ratio to the Non-GAAP Return on Average Common Equity ratio, and the Non-GAAP Return on Average Tangible Common Equity ratio are presented below:
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands)
Total average shareholders’ equity
$
797,756

 
$
769,617

 
$
729,489

 
$
666,216

 
$
615,795

LESS: Average Series D preferred stock (non-convertible)
(47,753
)
 
(47,753
)
 
(47,753
)
 
(47,753
)
 
(33,921
)
Average common equity (non-GAAP)
750,003

 
721,864

 
681,736

 
618,463

 
581,874

LESS: Average goodwill and intangible assets, net
(164,530
)
 
(181,976
)
 
(188,533
)
 
(144,658
)
 
(132,908
)
Average Tangible Common Equity (non-GAAP)
585,473

 
539,888

 
493,203

 
473,805

 
448,966

 
 
 
 
 


 


 


Net income attributable to the Company
$
40,591

 
$
71,628

 
$
64,925

 
$
68,815

 
$
70,535

Less: Dividends on Series D preferred stock
(3,475
)
 
(3,475
)
 
(3,475
)
 
(3,475
)
 
(2,297
)
Common net income (non-GAAP)
37,116

 
68,153

 
61,450

 
65,340

 
68,238

ADD: Amortization of intangibles, net of tax (35%)
3,641

 
4,083

 
4,362

 
3,143

 
2,813

Tangible common net income (non-GAAP)
$
40,757

 
$
72,236

 
$
65,812

 
$
68,483

 
$
71,051

 
 
 
 
 
 
 
 
 
 
LESS: (Gain)/ loss on sale of affiliates or offices
$
1,264

 
$
(2,862
)
 
$

 
$

 
$

ADD: Anchor's transaction expense
400

 

 

 

 

ADD: Impairment of goodwill
24,901

 
9,528

 

 

 

ADD: Restructuring

 
2,017

 
3,724

 
739

 

LESS: Tax effects of adjusting items (35%), if any (a)
(582
)
 
(3,039
)
 
(1,303
)
 
(259
)
 

ADD: Impact from enactment of the Tax Act
12,880

 

 

 

 

Total adjustments due to notable items
$
38,863

 
$
5,644

 
$
2,421

 
$
480

 
$

Net income attributable to the Company, as adjusted (non-GAAP)
$
79,454

 
$
77,272

 
$
67,346

 
$
69,295

 
$
70,535

Common net income, as adjusted (non-GAAP)
$
75,979

 
$
73,797

 
$
63,871

 
$
65,820

 
$
68,238

Tangible common net income, as adjusted (non-GAAP)
$
79,620

 
$
77,880

 
$
68,233

 
$
68,963

 
$
71,051

 
 
 
 
 
 
 
 
 
 
Return on average assets
0.50
%
 
0.95
%
 
0.91
%
 
1.04
%
 
1.13
%
Return on average assets, as adjusted (non-GAAP) (4)
0.97
%
 
1.02
%
 
0.95
%
 
1.05
%
 
1.13
%
Return on average equity
5.09
%
 
9.31
%
 
8.90
%
 
10.33
%
 
11.45
%
Return on average equity, as adjusted (non-GAAP) (4)
9.96
%
 
10.04
%
 
9.23
%
 
10.40
%
 
11.45
%
Return on average common equity (non-GAAP) (4)
4.95
%
 
9.44
%
 
9.01
%
 
10.56
%
 
11.73
%
Return on average common equity, as adjusted (non-GAAP) (4)
10.13
%
 
10.22
%
 
9.37
%
 
10.64
%
 
11.73
%
Return on average tangible common equity (non-GAAP) (4)
6.96
%
 
13.38
%
 
13.34
%
 
14.45
%
 
15.83
%
Return on average tangible common equity, as adjusted (non-GAAP) (4)
13.60
%
 
14.43
%
 
13.83
%
 
14.56
%
 
15.83
%
_______________
(a)
Tax effect applied to all adjusting items except for the 2017 impairment of goodwill due to the nature of the goodwill impaired during that time period.
(5)
The Company uses certain non-GAAP financial measures, such as the Efficiency Ratio on a Fully Taxable Equivalent (“FTE”) basis, to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector. The Company excludes impairment of goodwill and amortization of intangibles in the calculation.

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The Company calculates the Efficiency Ratio, FTE basis, by reducing operating expenses by amortization of intangibles, impairment of goodwill, and restructuring expense and increasing total revenue by the FTE adjustment. A reconciliation from the Unadjusted Efficiency Ratio to the Efficiency Ratio, FTE Basis, as Adjusted, is presented below:
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands)
Total operating expense (GAAP)
$
299,936

 
$
264,953

 
$
255,181

 
$
227,129

 
$
220,705

LESS: Amortization of intangibles
5,601

 
6,282

 
6,711

 
4,836

 
4,327

LESS: Goodwill impairment
24,901

 
9,528

 

 

 

LESS: Restructuring expense

 
2,017

 
3,724

 
739

 

Total operating expense (excluding amortization of intangibles, goodwill impairment, and restructuring) (non-GAAP)
$
269,434

 
$
247,126

 
$
244,746

 
$
221,554

 
$
216,378

 
 
 
 
 
 
 
 
 
 
Net interest income
$
224,686

 
$
200,438

 
$
185,770

 
$
179,701

 
$
174,018

Fees and other income
153,966

 
158,787

 
161,169

 
140,798

 
136,341

FTE income
11,515

 
10,130

 
11,035

 
9,249

 
8,326

Total revenue (FTE basis)
$
390,167

 
$
369,355

 
$
357,974

 
$
329,748

 
$
318,685

Efficiency Ratio, unadjusted, before FTE revenue, deduction of amortization of intangibles, goodwill impairment, and restructuring expense
79.21
%
 
73.76
%
 
73.55
%
 
70.87
%
 
71.11
%
Efficiency Ratio, FTE Basis excluding amortization of intangibles, goodwill impairment, and restructuring expense
69.06
%
 
66.91
%
 
68.37
%
 
67.19
%
 
67.90
%
(6)
Net interest margin represents net interest income on a fully-taxable equivalent basis as a percent of average interest-earning assets.
(7)
Total revenue is defined as net interest income plus fees and other income.

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(8)
The Company uses certain non-GAAP financial measures, such as the Tangible Common Equity to Tangible Assets ratio, to provide information for investors to effectively analyze financial trends of ongoing business activities, and to enhance comparability with peers across the financial sector.
The Company calculates tangible assets by adjusting total assets to exclude goodwill and intangible assets. The Company calculates tangible common equity by adjusting total shareholders’ equity to exclude goodwill, intangible assets, and, the equity from the Series D preferred stock (non-convertible).
A reconciliation from the Company’s GAAP Total Shareholders’ Equity to Total Assets ratio to the Non-GAAP Tangible Common Equity to Tangible Assets ratio and to the Non-GAAP Tier 1 Common Equity to Risk Weighted Assets ratio is presented below:
 
2017
 
2016
 
2015
 
2014
 
2013
 
(In thousands)
Total balance sheet assets
$
8,311,744

 
$
7,970,474

 
$
7,542,508

 
$
6,797,874

 
$
6,437,109

LESS: Goodwill and intangible assets, net (9)
(138,775
)
 
(169,279
)
 
(185,089
)
 
(191,800
)
 
(130,784
)
Tangible assets (non-GAAP)
$
8,172,969

 
$
7,801,195

 
$
7,357,419

 
$
6,606,074

 
$
6,306,325

Total shareholders’ equity
$
785,944

 
$
768,481

 
746,613

 
703,911

 
633,688

LESS: Goodwill and intangible assets, net
(138,775
)
 
(169,279
)
 
(185,089
)
 
(191,800
)
 
(130,784
)
Series D Preferred Stock (non-convertible)
(47,753
)
 
(47,753
)
 
(47,753
)
 
(47,753
)
 
(47,753
)
Total adjustments
(186,528
)
 
(217,032
)
 
(232,842
)
 
(239,553
)
 
(178,537
)
Tangible Common Equity (non-GAAP)
$
599,416

 
$
551,449

 
$
513,771

 
$
464,358

 
$
455,151

Total Equity/Total Assets
9.46
%
 
9.64
%
 
9.90
%
 
10.35
%
 
9.84
%
Tangible Common Equity/Tangible Assets (non-GAAP)
7.33
%
 
7.07
%
 
6.98
%
 
7.03
%
 
7.22
%
 
 
 
 
 
 
 
 
 
 
Total Risk Weighted Assets (a)
$
5,892,286

 
$
5,716,037

 
$
5,449,239

 
$
5,073,973

 
$
4,668,531

Tier 1 Common Equity (a)
$
607,800

 
$
571,663

 
$
534,241

 
$
468,902

 
$
463,627

Tier 1 Common Equity/ Risk Weighted Assets (a)
10.32
%
 
10.00
%
 
9.80
%
 
9.24
%
 
9.93
%
____________
(a)
Risk Weighted Assets were calculated under the regulatory rules in effect at the time of the original filing of the Federal Reserve report for the respective periods. Components of Tier 1 Common Equity, for all years presented, are based on the capital rules currently in effect.
(9)
Includes the goodwill and intangibles, net for Anchor. For regulatory reporting, the goodwill and intangibles for Anchor are reclassed from other assets held for sale to goodwill and intangibles in regulatory reports and ratios.



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ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Management’s discussion and analysis of financial condition and results of operations should be read in conjunction with the Consolidated Financial Statements, the notes thereto, and other statistical information included in this annual report.

Executive Summary
The Company offers a wide range of private banking and wealth management services to high net worth individuals, families, businesses and select institutions through its four reportable segments: Private Banking, Wealth Management and Trust, Investment Management, and Wealth Advisory. This Executive Summary provides an overview of the most significant aspects of our operating segments and the Company’s operations in 2017. Details of the matters addressed in this summary are provided elsewhere in this document and, in particular, in the sections immediately following.
Net income attributable to the Company was $40.6 million for the year ended December 31, 2017, compared to net income attributable to the Company of $71.6 million in 2016 and $64.9 million in 2015. The Company recognized diluted earnings per share of $0.42 for the year ended December 31, 2017, compared to diluted earnings per share of $0.81 in 2016 and $0.74 in 2015.
Key items that affected the Company’s 2017 results include:
Net interest income for the year ended December 31, 2017 was $224.7 million, an increase of $24.2 million, or 12%, compared to 2016. The 2017 increase was due to higher volume in the loan portfolio, particularly commercial real estate and residential loans, higher yields on loans and investments, and higher volume of investments. This was partially offset by higher rates paid on deposits and borrowings, and an increase in the average volume of interest-bearing deposits and borrowings. Net interest margin (“NIM”) increased eleven basis points to 3.04% in 2017 from 2.93% in 2016, after increasing one basis point from 2.92% in 2015.
Recurring fees and income, which includes investment management fees, wealth advisory fees, wealth management and trust fees, other banking fee income, and gain on sale of loans, net, for the year ended December 31, 2017 were $152.8 million, an increase of $1.1 million, or 1%, from 2016. The 2017 increase was due to increases in wealth advisory fees, wealth management and trust fees, and investment management fees, partially offset by decreases in other banking fee income and lower gains on sale of loans.
The Company recorded a credit to the provision for loan losses of $7.7 million for the year ended December 31, 2017, compared to a credit to the provision for loan losses of $6.9 million in 2016. The 2017 credit to the provision for loan losses was primarily due to net recoveries and an improvement in loss factors, partially offset by an increase in criticized loans and commercial and residential loan growth.
In December 2017, the Company entered into an agreement to sell its entire ownership interest in Anchor in a transaction that will result in Anchor being majority-owned by members of its management team. The Company’s annual goodwill impairment test resulted in a fourth quarter 2017 goodwill impairment charge of $24.9 million. The Company will receive at closing approximately $32 million of cash and future revenue share payments that, at signing, have a net present value of approximately $15 million, subject to purchase price adjustments. In addition to the goodwill impairment charge the Holding Company recorded a $1.3 million loss on sale for the estimated closing expenses related to this transaction. This transaction has been approved by the Company’s board of directors and is subject to obtaining client consents, Anchor raising debt financing, and customary closing conditions.
The Company recorded total operating expenses of $299.9 million for the year ended December 31, 2017, compared to total operating expenses of $265.0 million in 2016. Excluding goodwill impairment charges in 2017 and goodwill impairment and restructuring charges in 2016, total operating expenses increased $21.6 million, or 9% in 2017 from 2016. This increase in operating expense was due to increases in salaries and employee benefits, information systems, occupancy and equipment, and professional fees expenses.
In December 2017, the Tax Act was enacted by the U.S. government. Substantially all of the provisions of the Tax Act are effective as of January 1, 2018. The more significant changes in the Tax Act that impact the Company are the reduction in the federal corporate tax rate from 35% to 21% and the changes to the deductibility of executive compensation, both of which are effective as of January 1, 2018. Under ASC 740, the tax effects of changes in tax laws must be recognized in the period in which the law is enacted, or December 2017 for the Tax Act. ASC 740 also requires deferred tax assets and liabilities to be measured at

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the enacted tax rate expected to apply when temporary differences are to be realized or settled. The Company re-measured its deferred tax assets and liabilities at the 21% federal corporate tax rate, reevaluated its investments in affordable housing projects using the 21% federal corporate tax rate, and reduced its deferred tax assets associated with executive compensation that is no longer deductible. As a result of these changes, the Company recorded a federal tax expense of $12.9 million in the fourth quarter of 2017, which is the primary driver of the higher income tax expense for the year ended December 31, 2017 as compared to 2016 and 2015.
Assets under management and advisory (“AUM”), excluding Anchor, increased $2.4 billion, or 13%, for the year ended December 31, 2017 to $21.2 billion due to net flows of $0.5 billion and market appreciation of $2.0 billion. Positive net flows were seen in all three wealth management segments.

Private Banking
The following table presents a summary of selected financial data for the Private Banking segment for 2017, 2016, and 2015.
 
As of and for the year ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In thousands)
Net interest income
$
227,280

 
$
202,702

 
$
189,501

 
$
24,578

 
12
 %
 
$
13,201

 
7
%
Fees and other income
10,856

 
18,947

 
11,352

 
(8,091
)
 
(43
)%
 
7,595

 
67
%
Total revenues
238,136

 
221,649

 
200,853

 
16,487

 
7
 %
 
20,796

 
10
%
Provision/ (credit) for loan losses
(7,669
)
 
(6,935
)
 
(1,555
)
 
(734
)
 
nm

 
(5,380
)
 
346
%
Total operating expenses
149,008

 
125,116

 
116,575

 
23,892

 
19
 %
 
8,541

 
7
%
Income before income taxes
96,797

 
103,468

 
85,833

 
(6,671
)
 
(6
)%
 
17,635

 
21
%
Income tax expense
43,356

 
33,120

 
27,844

 
10,236

 
31
 %
 
5,276

 
19
%
Net income attributable to the Company
$
53,441

 
$
70,348

 
$
57,989

 
$
(16,907
)
 
(24
)%
 
$
12,359

 
21
%
Total loans
$
6,505,028

 
$
6,114,354

 
$
5,719,212

 
$
390,674

 
6
 %
 
$
395,142

 
7
%
Assets
$
8,177,304

 
$
7,816,671

 
$
7,361,202

 
$
360,633

 
5
 %
 
$
455,469

 
6
%
Deposits (1)
$
6,600,934

 
$
6,161,118

 
$
6,109,921

 
$
439,816

 
7
 %
 
$
51,197

 
1
%
____________
nm - not meaningful
(1)
Deposits presented in this table do not include intercompany eliminations related to deposits in the Bank from Wealth and Investment affiliates or the Holding Company.
The Company’s Private Banking segment reported net income attributable to the Company of $53.4 million in the year ended December 31, 2017, compared to net income attributable to the Company of $70.3 million in 2016 and $58.0 million in 2015. The Private Banking segment reported higher income tax expense due to the re-measurement of deferred tax assets at the new, lower, federal corporate tax rate enacted with the Tax Act. The re-measurement amounted to $14.2 million for the Private Banking segment and is reflected in the higher income tax expense for the year ended December 31, 2017. Income before income taxes decreased $6.7 million in 2017 as a result of a $23.9 million, or 19%, increase in operating expenses, a decline of $8.1 million, or 43%, in fees and other income, partially offset by an increase of $24.6 million, or 12% in net interest income. The increase in operating expenses we primarily due to increased salaries and employee benefits, information systems, occupancy and equipment, and professional services. The decline in fees in other income was primarily due to lower swap fees. The increase in net interest income was primarily due to increased volume of loans and higher net interest margin. The 2016 increase was due to increased net interest income, increased banking fee income, a higher credit to the provision for loan losses, and a $2.9 million gain on sale of offices in Southern California, partially offset by increased operating expenses, including in particular higher salaries and employee benefits and occupancy and equipment expenses.
Total loans at the Bank increased $0.4 billion, or 6%, to $6.5 billion. Total loans were 80% of total assets at the Bank at December 31, 2017 up from 78% of total assets at December 31, 2016. A discussion of the Company’s loan portfolio can be found below in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Loan Portfolio and Credit Quality.”

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Deposits at the Bank increased $0.4 billion, or 7%, to $6.6 billion in 2017 from $6.2 billion in 2016. A discussion of the Company’s deposits can be found below in Part II. Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Financial Condition.”

Wealth Management and Trust
The following table presents a summary of selected financial data for the Wealth Management and Trust segment for 2017, 2016, and 2015.
 
As of and for the year ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In thousands)
Wealth management and trust fees
$
45,362

 
$
43,980

 
$
51,309

 
$
1,382

 
3
 %
 
$
(7,329
)
 
(14
)%
Other income
451

 
421

 
2,027

 
30

 
7
 %
 
(1,606
)
 
(79
)%
Total revenues
45,813

 
44,401

 
53,336

 
1,412

 
3
 %
 
(8,935
)
 
(17
)%
Operating expenses, before restructuring and impairment of goodwill
49,287

 
53,299

 
50,750

 
(4,012
)
 
(8
)%
 
2,549

 
5
 %
Restructuring expense

 
2,017

 
3,724

 
(2,017
)
 
(100
)%
 
(1,707
)
 
(46
)%
Impairment of goodwill

 
9,528

 

 
(9,528
)
 
(100
)%
 
9,528

 
nm

Total operating expenses
49,287

 
64,844

 
54,474

 
(15,557
)
 
(24
)%
 
10,370

 
19
 %
Income/ (loss) before income taxes
(3,474
)
 
(20,443
)
 
(1,138
)
 
16,969

 
83
 %
 
(19,305
)
 
nm

Income tax expense/ (benefit)
(509
)
 
(8,279
)
 
(350
)
 
7,770

 
94
 %
 
(7,929
)
 
nm

Net income/ (loss) attributable to the Company
$
(2,965
)
 
$
(12,164
)
 
$
(788
)
 
$
9,199

 
76
 %
 
$
(11,376
)
 
nm

AUM
$
7,865,000

 
$
7,008,000

 
$
7,976,000

 
$
857,000

 
12
 %
 
$
(968,000
)
 
(12
)%
____________
nm - not meaningful
The Company’s Wealth Management and Trust segment reported a net loss attributable to the Company of $3.0 million in the year ended December 31, 2017, compared to a net loss attributable to the Company of $12.2 million in 2016 and a net loss attributable to the Company of $0.8 million in 2015. The 2017 improvement in operating results was due to an 8% decrease in operating expenses, primarily salaries and benefits, before restructuring and impairment of goodwill as well as a 3% increase in total revenues. The 2016 net loss attributable to the Company was primarily due to a $9.5 million goodwill impairment charge and a $7.3 million decrease in wealth management and trust fee revenue due to the decrease in AUM. Additionally, there were increases in salaries and employee benefits, and occupancy and equipment expenses, partially offset by lower restructuring expense in 2016 as compared to 2015.
AUM increased $0.9 billion, or 12%, to $7.9 billion at December 31, 2017 from $7.0 billion at December 31, 2016. In 2017, the increase in AUM was primarily the result of market appreciation of $0.6 billion and net flows of $0.3 billion. In 2016, the decrease in AUM was primarily the result of net outflows of $0.7 billion and the disposition of $0.4 billion of certain accounts, partially offset by market appreciation of $0.1 billion.


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Investment Management
The following table presents a summary of selected financial data for the Investment Management segment for 2017, 2016, and 2015.
 
As of and for the year ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In thousands)
Investment management fees
$
45,515

 
$
44,410

 
$
45,694

 
$
1,105

 
2
 %
 
$
(1,284
)
 
(3
)%
Other income and net interest income
57

 
49

 
15

 
8

 
16
 %
 
34

 
227
 %
Total revenues
45,572

 
44,459

 
45,709

 
1,113

 
3
 %
 
(1,250
)
 
(3
)%
Operating expenses, before impairment of goodwill
34,131

 
32,863

 
33,690

 
1,268

 
4
 %
 
(827
)
 
(2
)%
Impairment of goodwill
24,901

 

 

 
24,901

 
nm

 

 
nm

Total operating expenses
59,032

 
32,863

 
33,690

 
26,169

 
80
 %
 
(827
)
 
(2
)%
Income/ (loss) before income taxes
(13,460
)
 
11,596

 
12,019

 
(25,056
)
 
(216
)%
 
(423
)
 
(4
)%
Income tax expense
3,811

 
3,789

 
3,956

 
22

 
1
 %
 
(167
)
 
(4
)%
Noncontrolling interests
1,973

 
2,077

 
2,265

 
(104
)
 
(5
)%
 
(188
)
 
(8
)%
Net income/ (loss) attributable to the Company
$
(19,244
)
 
$
5,730

 
$
5,798

 
$
(24,974
)
 
(436
)%
 
$
(68
)
 
(1
)%
AUM, including Anchor
$
11,281,000

 
$
10,571,000

 
$
9,952,000

 
$
710,000

 
7
 %
 
$
619,000

 
6
 %
Anchor AUM
$
9,277,000

 
$
8,768,000

 
$
8,111,000

 
$
509,000

 
6
 %
 
$
657,000

 
8
 %
AUM, excluding Anchor
$
2,004,000

 
$
1,803,000

 
$
1,841,000

 
$
201,000

 
11
 %
 
$
(38,000
)
 
(2
)%
____________
nm - not meaningful
The Company’s Investment Management segment reported a net loss attributable to the Company of $19.2 million in the year ended December 31, 2017, compared to net income attributable to the Company of $5.7 million in 2016 and $5.8 million in 2015. The $25.0 million decrease in 2017 was due to the $24.9 million impairment of goodwill at Anchor. In December 2017, the Company entered into an agreement to sell its interest in Anchor and Anchor’s assets and liabilities are classified as held for sale at December 31, 2017. The final testing indicated goodwill impairment that resulted in Anchor’s carrying value being reduced to the expected approximate sale price per the sale agreement. Excluding the impairment of goodwill, the Investment Management segment reported a decrease in pre-tax income of $0.2 million, primarily due to a 4% increase in operating expenses before impairment of goodwill, partially offset by a 2% increase in investment management fee income. Results presented in the table above include the results of Anchor, except for the AUM data noted as excluding Anchor.
AUM, excluding Anchor, increased $0.2 billion, or 11%, to $2.0 billion at December 31, 2017 from $1.8 billion at December 31, 2016. In 2017, the increase in AUM, excluding Anchor, was primarily the result of market appreciation of $0.2 billion, with immaterial net flows. In 2016, the decrease in AUM, excluding Anchor, was primarily the result of net outflows of $0.4 billion, offset by market appreciation of $0.4 billion.


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Wealth Advisory
The following table presents a summary of selected financial data for the Wealth Advisory segment for 2017, 2016, and 2015.
 
As of and for the year ended December 31,
 
2017 vs. 2016
 
2016 vs. 2015
 
2017
 
2016
 
2015
 
$ Change
 
% Change
 
$ Change
 
% Change
 
(In thousands)
Wealth advisory fees
$
52,559

 
$
50,581

 
$
50,437

 
$
1,978

 
4
%
 
$
144

 
 %
Other income and net interest income
201

 
121

 
127

 
80

 
66
%
 
(6
)
 
(5
)%
Total revenues
52,760

 
50,702

 
50,564

 
2,058

 
4
%
 
138

 
 %
Total operating expenses
35,753

 
34,791

 
35,379