Loan Portfolio and Credit Quality

The Bank’s lending activities are conducted principally in the regions of New England, San Francisco Bay, and Southern California.

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. Most loans are secured by borrowers’ personal or business assets. The ability of the Bank’s single family residential and consumer borrowers to honor their repayment commitments is generally dependent on the level of overall economic conditions within the Bank’s lending areas. Commercial, construction, and land borrowers’ ability to repay is generally dependent upon the health of the economy and real estate values, including, in particular, the performance of the construction sector. Accordingly, the ultimate collectability of a substantial portion of the Bank’s loan portfolio is susceptible to changing conditions in the New England, San Francisco Bay, and Southern California economies and real estate markets.

Total loans include deferred loan fees/ (costs), net, of ($4.3) million and ($4.1) million as of March 31, 2014 and December 31, 2013, respectively.

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



	March 31, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	852,201	$	866,053
Commercial real estate	1,858,634		1,813,394
Construction and land	174,716		153,917
Residential	2,035,855		2,032,294
Home equity	108,963		113,660
Consumer and other	132,101		133,141
Total Loans	$	5,162,470	$	5,112,459

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



	March 31, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	3,049	$	3,484
Commercial real estate	21,909		23,967
Construction and land	3,454		3,489
Residential	12,371		12,777
Home equity	1,018		1,020
Consumer and other	253		25
Total	$	42,054	$	44,762

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 $0.6 million of loans 90 days or more past due, but still accruing, as of March 31, 2014 and $0.1 million as of December 31, 2013. The Bank’s policy for returning a loan to accrual status requires the loan to be brought current and for the client to show a history of making timely payments (generally six consecutive months). For troubled debt restructured loans (“TDRs”), a return to accrual status generally requires timely payments for a period of six months in accordance with the restructured loan terms, along with meeting other criteria.

The following tables show the payment status of loans by class of receivable as of the dates indicated:



	March 31, 2014
	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 Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	433	$	—	$	—	$	433	$	1,082	$	—	$	1,967	$	3,049	$	848,719	$	852,201
Commercial real estate	2,998		—		526		3,524		11,613		362		9,934		21,909		1,833,201		1,858,634
Construction and land	20		13		67		100		351		17		3,086		3,454		171,162		174,716
Residential	6,769		—		—		6,769		3,201		1,764		7,406		12,371		2,016,715		2,035,855
Home equity	287		—		—		287		—		—		1,018		1,018		107,658		108,963
Consumer and other	24		33		—		57		14		—		239		253		131,791		132,101
Total	$	10,531	$	46	$	593	$	11,170	$	16,261	$	2,143	$	23,650	$	42,054	$	5,109,246	$	5,162,470



	December 31, 2013
	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 Past Due		Total Non-Accrual Loans		Current Accruing Loans		Total Loans Receivable
	(In thousands)
Commercial and industrial	$	1,075	$	454	$	—	$	1,529	$	1,192	$	—	$	2,292	$	3,484	$	861,040	$	866,053
Commercial real estate	775		—		—		775		13,337		—		10,630		23,967		1,788,652		1,813,394
Construction and land	1,631		21		65		1,717		392		43		3,054		3,489		148,711		153,917
Residential	8,181		226		—		8,407		4,058		1,630		7,089		12,777		2,011,110		2,032,294
Home equity	542		4		—		546		—		1,000		20		1,020		112,094		113,660
Consumer and other	826		7		—		833		17		—		8		25		132,283		133,141
Total	$	13,030	$	712	$	65	$	13,807	$	18,996	$	2,673	$	23,093	$	44,762	$	5,053,890	$	5,112,459

Nonaccruing and delinquent loans are affected by factors, such as economic and business conditions, interest rates, unemployment levels, and real estate collateral values, among others. In periods of prolonged economic downturns, 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 may not be renewed.

Generally, when a collateral dependent loan becomes impaired, an updated appraisal of the collateral, if appropriate, is obtained. If the impaired loan has not been upgraded to a performing status within a reasonable amount of time, the Bank will continue to obtain updated appraisals as deemed necessary, especially during periods of declining property values.

The past due status of a loan is determined in accordance with its contractual repayment terms. All loan types are reported past due when one scheduled payment is due and unpaid for 30 days or more.

Credit Quality Indicators

The Bank uses a risk rating system to monitor the credit quality of its loan portfolio. Loan classifications are assessments made by the Bank of the status of the loans based on the facts and circumstances known to the Bank, including management’s judgment, at the time of assessment. Some or all of these classifications may change in the future if there are unexpected changes in the financial condition of the borrower, including but not limited to, changes resulting from continuing deterioration in general economic conditions on a national basis or in the local markets in which the Bank operates adversely affecting, among other things, real estate values. Such conditions, as well as other factors which adversely affect borrowers’ ability to service or repay loans, typically result in changes in loan default and charge-off rates, and increased provisions for loan losses, which would adversely affect the Company’s financial performance and financial condition. These circumstances are not entirely foreseeable and, as a result, it may not be possible to accurately reflect them in the Company’s analysis of credit risk.

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, 2013, follows:

Pass - All loans graded as pass are considered acceptable credit quality by the Bank and are grouped for purposes of calculating the allowance for loan losses. 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 pass unless there is known information such as delinquency or client requests for modifications which, due to financial difficulty, would then generally result in a risk rating such as special mention or more severe depending on the factors.

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

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

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

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



	March 31, 2014
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	832,923	$	8,701	$	7,528	$	3,049	$	852,201
Commercial real estate	1,739,064		76,087		21,574		21,909		1,858,634
Construction and land	153,076		17,646		540		3,454		174,716
Residential	2,011,735		—		11,749		12,371		2,035,855
Home equity	107,223		—		722		1,018		108,963
Consumer and other	130,848		993		7		253		132,101
Total	$	4,974,869	$	103,427	$	42,120	$	42,054	$	5,162,470



	December 31, 2013
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	849,535	$	4,857	$	8,177	$	3,484	$	866,053
Commercial real estate	1,709,265		60,305		19,857		23,967		1,813,394
Construction and land	128,667		21,172		589		3,489		153,917
Residential	2,006,707		—		12,810		12,777		2,032,294
Home equity	112,065		—		575		1,020		113,660
Consumer and other	132,130		979		7		25		133,141
Total	$	4,938,369	$	87,313	$	42,015	$	44,762	$	5,112,459

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



	As of and for the three months ended March 31, 2014
	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	$	2,049	$	3,161	n/a		$	2,110	$	3
Commercial real estate	29,346		40,065		n/a		30,416		269
Construction and land	730		1,456		n/a		816		—
Residential	10,163		10,766		n/a		7,134		144
Home equity	50		50		n/a		50		1
Consumer and other	7		7		n/a		7		—
Subtotal	42,345		55,505		n/a		40,533		417
With an allowance recorded:
Commercial and industrial	1,082		1,191		$	74	1,284		9
Commercial real estate	7,814		8,243		1,095		8,453		91
Construction and land	2,724		2,951		239		2,731		—
Residential	7,725		7,985		743		9,874		69
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	19,345		20,370		2,151		22,342		169
Total:
Commercial and industrial	3,131		4,352		74		3,394		12
Commercial real estate	37,160		48,308		1,095		38,869		360
Construction and land	3,454		4,407		239		3,547		—
Residential	17,888		18,751		743		17,008		213
Home equity	50		50		—		50		1
Consumer and other	7		7		—		7		—
Total	$	61,690	$	75,875	$	2,151	$	62,875	$	586

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



	As of and for the three months ended March 31, 2013
	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	$	7,859	$	9,043	n/a		$	7,251	$	81
Commercial real estate	39,348		58,523		n/a		39,835		101
Construction and land	934		1,547		n/a		2,633		91
Residential	6,696		8,164		n/a		3,427		29
Home equity	40		40		n/a		280		1
Consumer and other	—		—		n/a		—		—
Subtotal	54,877		77,317		n/a		53,426		303
With an allowance recorded:
Commercial and industrial	3,245		3,310		$	369	1,676		4
Commercial real estate	24,475		25,957		2,446		20,702		112
Construction and land	3,965		4,046		417		1,637		—
Residential	10,584		10,843		1,496		13,633		112
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	42,269		44,156		4,728		37,648		228
Total:
Commercial and industrial	11,104		12,353		369		8,927		85
Commercial real estate	63,823		84,480		2,446		60,537		213
Construction and land	4,899		5,593		417		4,270		91
Residential	17,280		19,007		1,496		17,060		141
Home equity	40		40		—		280		1
Consumer and other	—		—		—		—		—
Total	$	97,146	$	121,473	$	4,728	$	91,074	$	531

___________________


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



	As of and for the year ended December 31, 2013
	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	$	2,084	$	3,222	n/a		$	3,908	$	332
Commercial real estate	31,917		42,493		n/a		33,861		1,265
Construction and land	1,072		1,798		n/a		1,472		109
Residential	5,536		7,818		n/a		4,139		134
Home equity	50		50		n/a		126		5
Consumer and other	7		7		n/a		2		—
Subtotal	40,666		55,388		n/a		43,508		1,845
With an allowance recorded:
Commercial and industrial	1,353		1,453		$	100	2,228		63
Commercial real estate	8,692		9,166		730		17,904		810
Construction and land	2,758		2,982		236		3,415		—
Residential	10,598		10,598		912		12,608		484
Home equity	—		—		—		—		—
Consumer and other	—		—		—		—		—
Subtotal	23,401		24,199		1,978		36,155		1,357
Total:
Commercial and industrial	3,437		4,675		100		6,136		395
Commercial real estate	40,609		51,659		730		51,765		2,075
Construction and land	3,830		4,780		236		4,887		109
Residential	16,134		18,416		912		16,747		618
Home equity	50		50		—		126		5
Consumer and other	7		7		—		2		—
Total	$	64,067	$	79,587	$	1,978	$	79,663	$	3,202

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

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

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

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

The Bank may, under certain circumstances, restructure loans as a concession to borrowers who are experiencing financial difficulty. Such loans are classified as TDRs and are included in impaired loans. TDRs typically result from the Bank’s loss mitigation activities which, among other things, could include rate reductions, payment extensions, and/or principal forgiveness. TDRs totaled $49.4 million and $54.5 million as of March 31, 2014 and December 31, 2013, respectively. Of the $49.4 million in TDRs as of March 31, 2014, $26.6 million were on accrual status. Of the $54.5 million in TDRs as of December 31, 2013, $28.4 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 or allocated reserve on the particular loan. Therefore, depending upon the result of the impairment analysis, there could be an increase or decrease in the related allowance for loan losses. Many loans initially categorized as TDRs are already on nonaccrual status and are already considered impaired. Therefore, there is generally not a material change to the allowance for loan losses when a nonaccruing loan is categorized as a TDR.

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



	As of and for the three months ended March 31, 2014
	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	—	$	—	$	—	—	$	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential (1)	1	172		181		2	145
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	1	$	172	$	181	2	$	145

___________________


(1)	Represents the following concessions: temporary reduction of interest rate.



	As of and for the three months ended March 31, 2013
	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	$	1,219	$	1,219	—	$	—
Commercial real estate (2)	5	9,163		9,163		1	561
Construction and land (3)	1	347		347		—	—
Residential	—	—		—		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	8	$	10,729	$	10,729	1	$	561

___________________


(1)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.0 million); and temporary rate reduction (1 loan; post-modification recorded investment of $0.2 million).


(2)	Represents the following concessions: extension of term (4 loans; post-modification recorded investment of $9.0 million) and combination of concessions (1 loan; post-modification recorded investment of $0.2 million).


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