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 ($4.8) million and ($4.1) million as of June 30, 2014 and December 31, 2013, respectively.

In the second quarter of 2014, the Bank sold $57.0 million of commercial real estate loans for a $1.6 million gain.

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



	June 30, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	882,463	$	866,053
Commercial real estate	1,780,901		1,813,394
Construction and land	150,422		153,917
Residential	2,039,072		2,032,294
Home equity	112,504		113,660
Consumer and other	140,689		133,141
Total Loans	$	5,106,051	$	5,112,459

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



	June 30, 2014		December 31, 2013
	(In thousands)
Commercial and industrial	$	2,177	$	3,484
Commercial real estate	19,421		23,967
Construction and land	3,396		3,489
Residential	14,080		12,777
Home equity	1,273		1,020
Consumer and other	1,273		25
Total	$	41,620	$	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 $0.1 million of loans 90 days or more past due, but still accruing, as of both June 30, 2014 and 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:



	June 30, 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	$	529	$	370	$	—	$	899	$	210	$	—	$	1,967	$	2,177	$	879,387	$	882,463
Commercial real estate	1,318		824		—		2,142		18,141		—		1,280		19,421		1,759,338		1,780,901
Construction and land	—		11		66		77		296		14		3,086		3,396		146,949		150,422
Residential	—		265		—		265		3,622		1,711		8,747		14,080		2,024,727		2,039,072
Home equity	2,522		—		—		2,522		19		—		1,254		1,273		108,709		112,504
Consumer and other	134		11		—		145		1,032		—		241		1,273		139,271		140,689
Total	$	4,503	$	1,481	$	66	$	6,050	$	23,320	$	1,725	$	16,575	$	41,620	$	5,058,381	$	5,106,051



	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:



	June 30, 2014
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	860,727	$	11,548	$	8,011	$	2,177	$	882,463
Commercial real estate	1,663,408		77,407		20,665		19,421		1,780,901
Construction and land	128,892		17,646		488		3,396		150,422
Residential	2,014,692		—		10,300		14,080		2,039,072
Home equity	110,709		—		522		1,273		112,504
Consumer and other	139,409		—		7		1,273		140,689
Total	$	4,917,837	$	106,601	$	39,993	$	41,620	$	5,106,051



	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 and six months ended June 30, 2014
	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	$	2,037	$	3,154	n/a		$	2,043	$	2,081	$	1	$	4
Commercial real estate	24,277		34,378		n/a		25,577		27,804		1,564		1,833
Construction and land	730		1,456		n/a		731		779		—		—
Residential	12,215		12,818		n/a		11,035		8,930		54		198
Home equity	50		50		n/a		50		50		—		1
Consumer and other	1,007		1,007		n/a		257		150		1		1
Subtotal	40,316		52,863		n/a		39,693		39,794		1,620		2,037
With an allowance recorded:
Commercial and industrial	1,060		1,168		$	74	1,089		1,201		19		28
Commercial real estate	7,594		8,022		1,003		7,660		8,091		97		188
Construction and land	2,666		2,897		221		2,696		2,712		—		—
Residential	6,996		6,996		609		7,544		8,850		56		125
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	18,316		19,083		1,907		18,989		20,854		172		341
Total:
Commercial and industrial	3,097		4,322		74		3,132		3,282		20		32
Commercial real estate	31,871		42,400		1,003		33,237		35,895		1,661		2,021
Construction and land	3,396		4,353		221		3,427		3,491		—		—
Residential	19,211		19,814		609		18,579		17,780		110		323
Home equity	50		50		—		50		50		—		1
Consumer and other	1,007		1,007		—		257		150		1		1
Total	$	58,632	$	71,946	$	1,907	$	58,682	$	60,648	$	1,792	$	2,378

___________________


(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 and six months ended June 30, 2013
	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	$	2,947	$	4,108	n/a		$	3,752	$	5,503	$	189	$	270
Commercial real estate	29,838		44,362		n/a		34,007		36,921		433		534
Construction and land	1,086		1,802		n/a		1,099		1,866		6		97
Residential	3,087		4,506		n/a		5,767		4,597		57		86
Home equity	90		90		n/a		53		165		—		1
Consumer and other	—		—		n/a		—		—		—		—
Subtotal	37,048		54,868		n/a		44,678		49,052		685		988
With an allowance recorded:
Commercial and industrial	2,337		2,405		$	257	2,981		2,328		18		22
Commercial real estate	19,623		22,699		1,913		21,398		21,050		476		588
Construction and land	4,137		4,309		639		3,959		2,798		—		—
Residential	13,209		13,468		1,530		11,236		12,435		177		289
Home equity	—		—		—		—		—		—		—
Consumer and other	—		—		—		—		—		—		—
Subtotal	39,306		42,881		4,339		39,574		38,611		671		899
Total:
Commercial and industrial	5,284		6,513		257		6,733		7,831		207		292
Commercial real estate	49,461		67,061		1,913		55,405		57,971		909		1,122
Construction and land	5,223		6,111		639		5,058		4,664		6		97
Residential	16,296		17,974		1,530		17,003		17,032		234		375
Home equity	90		90		—		53		165		—		1
Consumer and other	—		—		—		—		—		—		—
Total	$	76,354	$	97,749	$	4,339	$	84,252	$	87,663	$	1,356	$	1,887

___________________


(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

___________________


(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 $41.3 million and $54.5 million as of June 30, 2014 and December 31, 2013, respectively. Of the $41.3 million in TDRs as of June 30, 2014, $24.9 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 June 30, 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)	2	115		115		—	—
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	2	$	115	$	115	—	$	—

___________________


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



	As of and for the six months ended June 30, 2014
	Restructured Year to Date					TDRs that defaulted 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	—	$	—	$	—	—	$	—
Commercial real estate	—	—		—		—	—
Construction and land	—	—		—		—	—
Residential (1)	3	287		296		2	145
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	3	$	287	$	296	2	$	145

___________________


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



	As of and for the three months ended June 30, 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)	1	$	150	$	150	—	$	—
Commercial real estate	—	—		—		2	2,994
Construction and land (2)	3	3,257		3,257		—	—
Residential (3)	8	707		707		1	1,116
Home equity (4)	1	40		40		—	—
Consumer and other	—	—		—		—	—
Total	13	$	4,154	$	4,154	3	$	4,110

___________________


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


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


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


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



	As of and for the six months ended June 30, 2013
	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	$	1,369	$	1,369	—	$	—
Commercial real estate (2)	5	9,163		9,163		3	3,555
Construction and land (3)	4	3,604		3,604		—	—
Residential (4)	8	707		707		1	1,116
Home equity (5)	1	40		40		—	—
Consumer and other	—	—		—		—	—
Total	21	$	14,883	$	14,883	4	$	4,671

___________________


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


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


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