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 may also purchase 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.

Total loans include deferred loan fees/ (costs), net, of ($3.8) million and ($3.2) million as of September 30, 2012 and December 31, 2011, respectively. Deferred loan fees/ (costs) include unamortized premiums or discounts related to mortgage loans purchased by the Bank.

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



	September 30, 2012		December 31, 2011
	(In thousands)
Commercial and industrial	$	786,335	$	678,048
Commercial real estate	1,804,811		1,678,274
Construction and land	164,891		153,709
Residential	1,941,217		1,823,403
Home equity	128,252		143,698
Consumer and other	142,101		174,096
Total Loans	$	4,967,607	$	4,651,228

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



	September 30, 2012		December 31, 2011
	(In thousands)
Commercial and industrial	$	6,395	$	3,759
Commercial real estate	41,273		38,581
Construction and land	5,648		7,772
Residential	19,192		17,513
Home equity	790		457
Consumer and other	96		27
Total	$	73,394	$	68,109

The Bank's policy is to discontinue the accrual of interest on a loan when the collectability of principal or interest is in doubt. In certain instances, although infrequent, loans that have become 90 days or more past due may remain on accrual status if the value of the collateral securing the loan is sufficient to cover principal and interest and the loan is in the process of collection. There were $2.7 million of loans 90 days or more past due, but still accruing, as of September 30, 2012 and an immaterial amount as of December 31, 2011. The Bank's policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six months). For troubled debt restructured loans (“TDR”s), a return to accrual status generally requires timely payments for a period of six months, along with meeting other criteria. TDRs are assessed on a case-by-case basis.

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



	September 30, 2012
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90 Days or Greater Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	1,086	$	1,464	$	—	$	2,550	$	4,854	$	100	$	1,441	$	6,395	$	777,390	$	786,335
Commercial real estate	2,445		925		2,625		5,995		30,389		4,682		6,202		41,273		1,757,543		1,804,811
Construction and land	25		13		50		88		4,008		209		1,431		5,648		159,155		164,891
Residential	—		2,680		—		2,680		9,749		5,000		4,443		19,192		1,919,345		1,941,217
Home equity	82		—		—		82		430		—		360		790		127,380		128,252
Consumer and other	775		5		—		780		89		1		6		96		141,225		142,101
Total	$	4,413	$	5,087	$	2,675	$	12,175	$	49,519	$	9,992	$	13,883	$	73,394	$	4,882,038	$	4,967,607



	December 31, 2011
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		90+ Days Past Due		Total Accruing Past Due		Current Payment Status		30-89 Days Past Due		90 Days or Greater Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	1,284	$	364	$	—	$	1,648	$	2,866	$	566	$	327	$	3,759	$	672,641	$	678,048
Commercial real estate	6,779		2,136		—		8,915		32,096		2,310		4,175		38,581		1,630,778		1,678,274
Construction and land	48		26		32		106		4,825		172		2,775		7,772		145,831		153,709
Residential	8,997		5,410		—		14,407		7,236		1,849		8,428		17,513		1,791,483		1,823,403
Home equity	1,223		—		—		1,223		131		—		326		457		142,018		143,698
Consumer and other	689		1		—		690		3		—		24		27		173,379		174,096
Total	$	19,020	$	7,937	$	32	$	26,989	$	47,157	$	4,897	$	16,055	$	68,109	$	4,556,130	$	4,651,228

Nonaccruing and delinquent loans are affected by factors, including economic and business conditions, such as interest rates, and unemployment levels, real estate collateral values, among others. In periods of prolonged economic declines, borrowers may become more severely impacted over time as liquidity levels decline and the borrower's ability to continue to make payments deteriorates. With respect to real estate collateral values, the declines from the peak, as well as the value of the real estate at the time of origination versus the current value, can impact the level of problem loans. For instance, if the loan to value ratio at the time of renewal has increased due to the decline in the real estate value since origination, the loan may no longer meet the Bank's underwriting standards and not be renewed.

Generally when a collateral dependent commercial loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. In limited circumstances, an updated appraisal is obtained on residential and home equity loans that are classified as impaired. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank continues to obtain newer appraisals, approximately every 12 to 18 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. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management's judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers' ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company's financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company's analysis of credit risk.

A summary of the rating system used by the Bank, repeated here from Part II. Item 8. “Financial Statements and Supplementary Data—Note 1: Basis of Presentation and Summary of Significant Accounting Policies,” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 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 losses. 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 client 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. In particular, loans in this category are considered more variable than other categories, since they will typically migrate through categories more quickly.

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

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

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



	September 30, 2012
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	756,475	$	12,095	$	11,370	$	6,395	$	786,335
Commercial real estate	1,608,853		70,914		83,771		41,273		1,804,811
Construction and land	146,804		9,321		3,118		5,648		164,891
Residential	1,914,346		—		7,679		19,192		1,941,217
Home equity	125,594		—		1,868		790		128,252
Consumer and other	139,913		2,092		—		96		142,101
Total	$	4,691,985	$	94,422	$	107,806	$	73,394	$	4,967,607



	December 31, 2011
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	641,831	$	10,209	$	22,249	$	3,759	$	678,048
Commercial real estate	1,454,786		121,802		63,105		38,581		1,678,274
Construction and land	131,205		10,978		3,754		7,772		153,709
Residential	1,798,635		—		7,255		17,513		1,823,403
Home equity	141,373		—		1,868		457		143,698
Consumer and other	173,927		132		10		27		174,096
Total	$	4,341,757	$	143,121	$	98,241	$	68,109	$	4,651,228

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



	As of and for the three and nine months ended September 30, 2012
	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	$	5,064	$	8,361	n/a		$	3,686	$	4,826	$	—	$	—
Commercial real estate	34,789		55,034		n/a		28,714		30,315		39		226
Construction and land	4,630		6,783		n/a		5,655		6,115		—		97
Residential	9,764		11,195		n/a		9,482		9,747		71		243
Home equity	360		360		n/a		360		354		1		3
Consumer and other	—		—		n/a		73		53		—		—
Subtotal	54,607		81,733		n/a		47,970		51,410		111		569
With an allowance recorded:
Commercial and industrial	1,285		1,285		123		2,731		1,983		—		—
Commercial real estate	25,516		26,901		2,507		24,462		25,190		200		562
Construction and land	1,018		1,062		425		2,187		1,662		—		—
Residential	12,067		12,067		1,080		12,885		11,604		119		277
Home equity	131		131		131		131		131		1		4
Consumer and other	—		—		—		—		—		—		—
Subtotal	40,017		41,446		4,266		42,396		40,570		320		843
Total:
Commercial and industrial	6,349		9,646		123		6,417		6,809		—		—
Commercial real estate	60,305		81,935		2,507		53,176		55,505		239		788
Construction and land	5,648		7,845		425		7,842		7,777		—		97
Residential	21,831		23,262		1,080		22,367		21,351		190		520
Home equity	491		491		131		491		485		2		7
Consumer and other	—		—		—		73		53		—		—
Total	$	94,624	$	123,179	$	4,266	$	90,366	$	91,980	$	431	$	1,412

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs of $24.2 million and historical nonaccrual interest paid, which was applied to principal, of $4.4 million.



	As of and for the three and nine months ended September 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	$	2,414	$	2,820	n/a		$	2,650	$	6,863	$	—	$	16
Commercial real estate	38,774		53,072		n/a		41,027		54,324		97		262
Construction and land	4,015		7,103		n/a		5,029		6,798		—		—
Residential	10,220		10,891		n/a		8,187		8,251		40		45
Home equity	326		360		n/a		1,120		885		—		—
Consumer and other	—		—		n/a		—		15		—		—
Subtotal	55,749		74,246		n/a		58,013		77,136		137		323
With an allowance recorded:
Commercial and industrial	121		125		15		124		803		—		—
Commercial real estate	23,811		26,722		3,172		32,552		27,036		153		274
Construction and land	1,565		1,729		327		1,524		2,976		—		—
Residential	5,074		5,074		366		4,301		4,080		41		115
Home equity	131		131		131		131		131		1		4
Consumer and other	—		—		—		—		—		—		—
Subtotal	30,702		33,781		4,011		38,632		35,026		195		393
Total:
Commercial and industrial	2,535		2,945		15		2,774		7,666		—		16
Commercial real estate	62,585		79,794		3,172		73,579		81,360		250		536
Construction and land	5,580		8,832		327		6,553		9,774		—		—
Residential	15,294		15,965		366		12,488		12,331		81		160
Home equity	457		491		131		1,251		1,016		1		4
Consumer and other	—		—		—		—		15		—		—
Total	$	86,451	$	108,027	$	4,011	$	96,645	$	112,162	$	332	$	716

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs of $18.7 million and historical nonaccrual interest paid, which was applied to principal, of $2.9 million.



	As of and for the year ended December 31, 2011
	Recorded Investment (1)		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized while Impaired
	(In thousands)
With no related allowance recorded:
Commercial and industrial	$	5,595	$	6,239	n/a		$	6,437	$	59
Commercial real estate	34,963		49,690		n/a		49,765		373
Construction and land	6,493		10,783		n/a		6,473		—
Residential	10,451		11,222		n/a		8,810		198
Home equity	326		360		n/a		745		—
Consumer and other	—		—		n/a		11		—
Subtotal	$	57,828	$	78,294	n/a		$	72,241	$	630
With an allowance recorded:
Commercial and industrial	1,123		1,137		149		748		—
Commercial real estate	23,202		24,398		3,307		26,274		440
Construction and land	1,279		1,302		219		2,591		—
Residential	6,230		6,230		402		4,279		137
Home equity	131		131		131		131		6
Consumer and other	—		—		—		—		—
Subtotal	$	31,965	$	33,198	$	4,208	$	34,023	$	583
Total:
Commercial and industrial	6,718		7,376		149		7,185		59
Commercial real estate	58,165		74,088		3,307		76,039		813
Construction and land	7,772		12,085		219		9,064		—
Residential	16,681		17,452		402		13,089		335
Home equity	457		491		131		876		6
Consumer and other	—		—		—		11		—
Total	$	89,793	$	111,492	$	4,208	$	106,264	$	1,213

___________________


(1)	Recorded investment represents the client loan balance net of historical charge-offs of $18.2 million and historical nonaccrual interest paid, which was applied to principal, of $3.5 million.

When management determines that it is probable that the Bank will not collect all principal and interest on a loan in accordance with the original loan terms, or in accordance with its restructured terms, if the loan is a TDR, the loan is designated as impaired.

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

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

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who have experienced financial difficulty. Such loans are classified as TDRs and are included in impaired loans. 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 $62.8 million and $55.3 million at September 30, 2012 and December 31, 2011, respectively. Of the $62.8 million in TDR loans at September 30, 2012, $26.7 million were on accrual status. Of the $55.3 million in TDR loans at December 31, 2011, $27.4 million were on accrual status.

Since all TDR loans are considered impaired loans, they are individually evaluated for impairment. The resulting impairment, if any, would have an impact on the allowance for loan losses as a specific reserve or charge-off. If, prior to the classification as a TDR, the loan was not impaired, there would have been a general reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a loan is categorized as a TDR.

The following tables present the balance of TDR loans that were restructured or defaulted during the periods indicated:



	As of and for the three months ended September 30, 2012
	Restructured Current Quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial (1)	2	$	1,807	$	1,807	—	$	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential (2)	1	3,150		3,150		3	1,282
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	3	$	4,957	$	4,957	3	$	1,282

___________________


(1)	Represents the following concessions: extension of term.


(2)	Represents the following concessions: temporary rate reduction.



	As of and for the nine months ended September 30, 2012
	Restructured Current Year to Date					TDRs that defaulted in the current year to date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial (1)	2	$	1,807	$	1,807	—	$	—
Commercial real estate (2)	6	7,387		7,468		—	—
Construction and land	—	—		—		—	—
Residential (3)	12	7,172		7,172		3	1,282
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	20	$	16,366	$	16,447	3	$	1,282

___________________


(1)	Represents the following concessions: extension of term.


(2)	Represents the following concessions: extension of term (5 loans; post-modification recorded investment of $4.7 million); and combination of concessions (1 loan; post-modification recorded investment of $2.8 million).


(3)	Represents the following concessions: payment deferral (1 loan; post-modification balance of $1.9 million); temporary rate reduction (10 loans; post-modification recorded investment of $4.0 million); and combination of concessions (1 loan; post-modification recorded investment of $1.3 million).



	As of and for the three months ended September 30, 2011
	Restructured Current Quarter					TDRs that defaulted in the current quarter that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial (1)	1	$	253	$	253	—	$	—
Commercial real estate (2)	1	991		991		1	1,156
Construction and land	—	—		—		—	—
Residential (3)	5	2,314		2,314		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	7	$	3,558	$	3,558	1	$	1,156

___________________


(1)	Represents the following concessions: combination of concessions.


(2)	Represents the following concessions: temporary rate reduction.


(3)	Represents the following concessions: temporary rate reduction (4 loans; post-modification recorded investment of $0.3 million); and extension of term (1 loan; post-modification recorded investment of $2.0 million).



	As of and for the nine months ended September 30, 2011
	Restructured Current Year to Date					TDRs that defaulted in the current year to date that were restructured in prior twelve months
	# of Loans	Pre- modification recorded investment		Post- modification recorded investment		# of Loans	Post- modification recorded investment
(Dollars In thousands)
Commercial and industrial (1)	3	$	1,937	$	1,937	1	$	125
Commercial real estate (2)	9	33,014		33,366		2	2,111
Construction and land (3)	1	428		428		—	—
Residential (4)	5	2,314		2,314		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	18	$	37,693	$	38,045	3	$	2,236

___________________


(1)	Represents the following concessions: combination of concessions.


(2)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.0 million); temporary rate reduction (4 loans; post-modification recorded investment of $13.7 million); and combination of concessions (4 loans; post-modification recorded investment of $18.7 million).


(3)	Represents the following concessions: extension of term.


(4)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $2.0 million); and temporary rate reduction (4 loans; post-modification recorded investment of $0.3 million).