Loans Receivable and Credit Quality

The Bank's lending activities are conducted principally in New England, San Francisco Bay, Southern California, and the Pacific Northwest. The Bank originates single and multi-family residential loans, commercial real estate loans, commercial and industrial loans, construction and land loans, and home equity and other consumer loans. The Bank also purchases high quality residential mortgage loans as a way to increase volumes more efficiently. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank's single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank's lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including the performance of the construction sector in particular. Accordingly, the ultimate collectability of a substantial portion of the Bank's loan portfolio is susceptible to changing conditions in the New England, San Francisco Bay, Southern California, and Pacific Northwest economies and real estate markets.

The following table presents a summary of the loan portfolio as of the dates indicated.



	June 30, 2011		December 31, 2010
	(In thousands)
Commercial and industrial	$	619,728	$	658,147
Commercial real estate	1,568,588		1,698,086
Construction and land	130,570		150,702
Residential mortgage	1,767,671		1,673,934
Home equity	153,528		158,430
Consumer and other	169,355		141,048
Total Loans	$	4,409,440	$	4,480,347

The following table presents non-accrual loans receivable as of the dates indicated.



	June 30, 2011		December 31, 2010
	(In thousands)
Commercial and industrial	$	3,044	$	8,583
Commercial real estate	55,067		66,518
Construction and land (1)	6,808		15,323
Residential mortgage	12,885		14,111
Home equity	2,133		799
Consumer and other	5		131
Total	$	79,942	$	105,465

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(1)	Does not include a non-accrual construction and land loan held for sale of $1.5 million at December 31, 2010. This loan was the one remaining loan in the Company's non-strategic Southern California loans held for sale portfolio.

The Bank's general policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although very infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were no loans 90 days or more past due, but still accruing, as of June 30, 2011 or December 31, 2010. The Bank's general policy for returning a loan to accrual status requires the loan to be brought current and for the customer to show a history of making timely payments (generally six months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months.

The following tables present an age analysis of loans receivable as of the dates indicated:



	June 30, 2011
	Accruing Past Due						Non-Accrual Loans
	30-59 Days Past Due		60-89 Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		Over 89 Days Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	1,599	$	365	$	1,964	$	2,253	$	352	$	439	$	3,044	$	614,720	$	619,728
Commercial real estate	2,381		324		2,705		34,212		4,164		16,691		55,067		1,510,816		1,568,588
Construction and land	—		—		—		2,552		—		4,256		6,808		123,762		130,570
Residential mortgage	—		1,318		1,318		7,575		487		4,823		12,885		1,753,468		1,767,671
Home equity	381		—		381		460		—		1,673		2,133		151,014		153,528
Consumer and other	133		—		133		5		—		—		5		169,217		169,355
Total	$	4,494	$	2,007	$	6,501	$	47,057	$	5,003	$	27,882	$	79,942	$	4,322,997	$	4,409,440



	As of December 31, 2010
	Accruing Past Due
	30-59 Days Past Due		60-89 Days Past Due		Total Accruing Past Due		Non-Accrual Loans (1) (2)		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	4,819	$	2,637	$	7,456	$	8,583	$	642,108	$	658,147
Commercial real estate	4,463		5,983		10,446		66,518		1,621,122		1,698,086
Construction and land	—		—		—		15,323		135,379		150,702
Residential mortgage	6,050		503		6,553		14,111		1,653,270		1,673,934
Home equity	237		—		237		799		157,394		158,430
Consumer and other	19		34		53		131		140,864		141,048
Total	$	15,588	$	9,157	$	24,745	$	105,465	$	4,350,137	$	4,480,347

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(1)	Does not include a non-accrual construction and land loan held for sale of $1.5 million at December 31, 2010. This loan was the one remaining loan in the Company's non-strategic Southern California loans held for sale portfolio.


(2)	Of the $105.5 million of non-accrual loans, $50.3 million, or 47%, had a current customer payment status, $12.3 million, or 12%, had a 30-89 day past due customer payment status, and $42.9 million, or 41%, had a customer payment status of more than 90 days past due.

Non-performing and delinquent loans are affected by factors such as the economic conditions in the Bank's geographic regions and interest rates. These factors, as well as others, are generally not within the Company's control. A decline in the fair values of the collateral for the non-performing loans could result in additional future provision for loan losses depending on the timing and severity of the decline. The Bank continues to evaluate the underlying collateral of each non-accrual loan and pursue the collection of interest and principal. Generally when a loan becomes past due or is adversely classified, an updated appraisal of the collateral is obtained. If the loan has not been upgraded to a performing status within a reasonable amount of time, the Bank continues to obtain newer appraisals, every 12 months or sooner if deemed necessary, especially during periods of declining values. The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Credit Quality Indicators

The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. A summary of the rating system used by the Bank, repeated here from Part II. Item 8. “Financial Statements and Supplementary Data—Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010 follows:

Acceptable or Pass All loans graded as acceptable or pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan loss. Only commercial loans, including commercial real estate, commercial and industrial loans, and construction and land loans are given a numerical grade. For residential, home equity and consumer loans, the Bank classifies loans as Acceptable or Pass unless there is known information such as delinquency or customer requests for modifications which would then generally result in a risk rating such as special mention or more severe depending on the factors.

Special Mention Loans rated in this category are defined as having potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the credit or the Bank's credit position. These loans are currently protected but have the potential to deteriorate to a substandard rating. For commercial loans, the borrower's financial performance may be inconsistent or below forecast, creating the possibility of liquidity problems and shrinking debt service coverage. In loans having this rating, the primary source of repayment is still good, but there is increasing reliance on collateral or guarantor support. Collectability of the loan is not yet in jeopardy.

Substandard Loans rated in this category are inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. A substandard credit has a well defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Substandard loans may be either still accruing or non-accruing depending upon the severity of the risk and other factors such as the value of the collateral, if any, and past due status.

Doubtful Loans rated in this category indicate that collection or liquidation in full on the basis of currently existing facts, conditions and values, is highly questionable and improbable. Loans in this category are usually on non-accrual and are generally classified as impaired.

The following table presents the loan portfolio's credit risk profile by internally assigned grade as of the dates indicated. See Part II. Item 8. “Financial Statements and Supplementary Data-Note 1: Basis of Presentation and Summary of Significant Accounting Policies, Loans” in the Company’s Annual Report on Form 10-K, as amended, for the year ended December 31, 2010 for a discussion of how the various internal risk grades relate to the likelihood of loss.



	June 30, 2011
	Grade or Non-Accrual Status
	Acceptable or Pass		Special Mention		Accruing Classified (1)		Non-Accrual Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	561,205	$	29,081	$	26,398	$	3,044	$	619,728
Commercial real estate	1,329,318		112,242		71,961		55,067		1,568,588
Construction and land	105,887		14,356		3,519		6,808		130,570
Residential mortgage	1,753,203		—		1,583		12,885		1,767,671
Home equity	150,599		796		—		2,133		153,528
Consumer and other	169,311		25		14		5		169,355
Total	$	4,069,523	$	156,500	$	103,475	$	79,942	$	4,409,440



	December 31, 2010
	Grade or Non-Accrual Status
	Acceptable or Pass		Special Mention		Accruing Classified (1)		Non-Accrual Loans (2)		Total
	(In thousands)
Commercial and industrial	$	601,364	$	29,698	$	18,502	$	8,583	$	658,147
Commercial real estate	1,420,682		135,605		75,281		66,518		1,698,086
Construction and land	115,056		18,083		2,240		15,323		150,702
Residential mortgage	1,658,656		196		971		14,111		1,673,934
Home equity	156,605		702		324		799		158,430
Consumer and other	137,466		3,331		120		131		141,048
Total	$	4,089,829	$	187,615	$	97,438	$	105,465	$	4,480,347

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(1)	Accruing classified loans include loans that are classified as substandard or doubtful but are still accruing interest income.


(2)	Does not include a non-accrual construction and land loan held for sale of $1.5 million at December 31, 2010. This loan was the one remaining loan in the Company's non-strategic Southern California loans held for sale portfolio.

The following tables present the balance of impaired loans with and without a related allowance, the associated allowance for those impaired loans with a related allowance, and the total unpaid principal on impaired loans for the dates and periods indicated:



	As of and for the three and six months ended June 30, 2011
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		QTD Average Recorded Investment		YTD Average Recorded Investment		QTD Interest Income Recognized while Impaired		YTD Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	2,765	$	3,354	$	—	$	6,757	$	7,507	$	—	$	16
Commercial real estate	39,647		55,604		—		57,518		52,781		80		165
Construction and land	5,245		8,391		—		5,925		7,436		—		—
Residential mortgage	7,512		8,025		—		8,086		7,936		20		24
Home equity	1,208		1,250		—		1,070		877		—		—
Consumer and other	—		—		—		—		21		—		—
Subtotal	56,377		76,624		—		79,356		76,558		100		205
With an allowance recorded:
Commercial and industrial	129		131		22		1,358		936		—		—
Commercial real estate	32,676		35,371		4,867		27,942		26,625		121		121
Construction and land	1,563		1,572		308		3,309		3,601		—		—
Residential mortgage	4,002		4,002		346		4,007		3,945		21		55
Home equity	131		131		131		131		131		2		3
Consumer and other	—		—		—		—		—		—		—
Subtotal	38,501		41,207		5,674		36,747		35,238		144		179
Total:
Commercial and industrial	2,894		3,485		22		8,115		8,443		—		16
Commercial real estate	72,323		90,975		4,867		85,460		79,406		201		286
Construction and land	6,808		9,963		308		9,234		11,037		—		—
Residential mortgage	11,514		12,027		346		12,093		11,881		41		79
Home equity	1,339		1,381		131		1,201		1,008		2		3
Consumer and other	—		—		—		—		21		—		—
Total	$	94,878	$	117,831	$	5,674	$	116,103	$	111,796	$	244	$	384

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(1)	Recorded investment represents the customer loan balance net of historical charge offs of $20.5 million and historical non-accrual interest paid, which is applied to principal, of $2.5 million.



	As of and for the year ended December 31, 2010
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	8,529	$	9,340	$	—
Commercial real estate	52,794		75,203		—
Construction and land	11,291		14,808		—
Residential mortgage	6,619		6,898		—
Home equity	799		831		—
Consumer and other	—		—		—
Subtotal	80,032		107,080		—
With an allowance recorded:
Commercial and industrial	54		54		54
Commercial real estate	16,736		18,028		3,174
Construction and land	4,032		4,773		1,067
Residential mortgage	3,823		3,823		332
Home equity	—		—		—
Consumer and other	—		—		—
Subtotal	24,645		26,678		4,627
Total:
Commercial and Industrial	8,583		9,394		54
Commercial real estate	69,530		93,231		3,174
Construction and land	15,323		19,581		1,067
Residential mortgage	10,442		10,721		332
Home equity	799		831		—
Consumer and other	—		—		—
Total	$	104,677	$	133,758	$	4,627

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(1)	Recorded investment represents the customer loan balance net of historical charge offs of $26.4 million and historical non-accrual interest paid, which was applied to principal, of $2.6 million.

When management determines that it is probable that the Bank will not collect all principal and interest on commercial loan types in accordance with the original loan terms, as well as all TDRs, the loan is designated as impaired.

Loans that are designated as impaired require an analysis to determine the amount of impairment, if any. The amount of impairment would be indicated as a result of the carrying value of the loan exceeding the estimated collateral value, less costs to sell, for collateral dependent loans or the net present value of the projected cash flow, discounted at the loan's contractual effective interest rate, for loans not considered to be collateral dependent. Generally, shortfalls in the analysis on collateral dependent loans would result in the impairment amount being charged off to the allowance for loan losses. Shortfalls on cash flow dependent loans may be carried as a specific reserve in the allocated component of the allowance for loan losses unless a known loss is determined to have occurred, in which case such known loss is charged off.

Loans in the held for sale category are carried at the lower of cost or estimated fair value in the aggregate and are excluded from the allowance for loan losses analysis.

The Company may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty. TDRs are included in impaired loans. These TDRs typically result from the Company’s loss mitigation activities which, among other activities, could include rate reductions, payment extensions, and/or principal forgiveness. TDRs totaled $47.9 million and $20.1 million at June 30, 2011 and December 31, 2010, respectively. Of the $47.9 million in TDR loans at June 30, 2011, $18.7 million were on accrual status. Of the $20.1 million in TDR loans at December 31, 2010, $4.0 million were on accrual status.