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. In December 2012, the Bank entered into an agreement to sell its three banking offices in the Pacific Northwest region, and therefore the loans included in the Pacific Northwest transaction were classified as held for sale and are not included in the December 31, 2012 data below. The sale was completed in May 2013.

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 $(4.1) million and $(4.2) million as of December 31, 2013 and 2012, respectively. Deferred loan fees/(costs) include unamortized premiums or discounts related to mortgage loans purchased by the Bank.

Mortgage loans serviced for others totaled $114.1 million and $138.9 million as of December 31, 2013 and 2012, respectively, and are not included in the Company’s total loans.

In 2012, the Bank transferred $108.7 million of adjustable-rate, interest-only residential first mortgage loans from its loan portfolio to the loans held for sale category, which subsequently sold for a $0.9 million net gain.

In the fourth quarter of 2012, as part of an agreement to sell its offices in the Pacific Northwest region, the Bank transferred $276.7 million of loans from its loan portfolio to the loans held for sale category. These loans were comprised of $40.8 million of commercial and industrial loans, $151.2 million of commercial real estate loans, $2.9 million of construction and land loans, $78.5 million of residential loans, $2.0 million of home equity loans, and $1.3 million of consumer loans. The loans were transferred to held for sale at their carrying values, as there was no expected gain or loss on the sale of these loans. The loans transferred to held for sale were all performing loans.

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



	December 31, 2013		December 31, 2012
	(In thousands)
Commercial and industrial	$	866,053	$	806,326
Commercial real estate	1,813,394		1,691,350
Construction and land	153,917		137,570
Residential	2,032,294		1,906,089
Home equity	113,660		123,551
Consumer and other	133,141		149,250
Total Loans	$	5,112,459	$	4,814,136

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



	December 31, 2013		December 31, 2012
	(In thousands)
Commercial and industrial	$	3,484	$	4,337
Commercial real estate	23,967		41,696
Construction and land	3,489		2,213
Residential	12,777		11,744
Home equity	1,020		660
Consumer and other	25		95
Total	$	44,762	$	60,745

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 December 31, 2013 and $3.6 million as of December 31, 2012. 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 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 present the payment status of loans receivable by class of receivable as of the dates indicated:



	December 31, 2013
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due		60-89 Days Past Due		90 Days or Greater 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	$	1,075	$	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



	December 31, 2012
	Accruing Past Due								Nonaccrual Loans
	30-59 Days Past Due (1)		60-89 Days Past Due		90 Days or Greater 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	$	10,684	$	210	$	257	$	11,151	$	3,073	$	—	$	1,264	$	4,337	$	790,838	$	806,326
Commercial real estate	3,331		4,572		3,249		11,152		29,125		8,913		3,658		41,696		1,638,502		1,691,350
Construction and land	42		3,216		50		3,308		723		137		1,353		2,213		132,049		137,570
Residential	20,194		3,218		—		23,412		5,101		1,980		4,663		11,744		1,870,933		1,906,089
Home equity	119		39		—		158		300		—		360		660		122,733		123,551
Consumer and other	569		182		—		751		93		—		2		95		148,404		149,250
Total	$	34,939	$	11,437	$	3,556	$	49,932	$	38,415	$	11,030	$	11,300	$	60,745	$	4,703,459	$	4,814,136

_____________________


(1)	Does not include one commercial and industrial 30-59 day delinquent loan totaling $0.3 million in loans held for sale as of December 31, 2012.

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 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 will continue 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.

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



	As of 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



	As of December 31, 2012
	By Loan Grade or Nonaccrual Status
	Pass		Special Mention (1)		Accruing Substandard		Nonaccrual Loans		Total
	(In thousands)
Commercial and industrial	$	779,236	$	13,691	$	9,062	$	4,337	$	806,326
Commercial real estate	1,531,701		54,000		63,953		41,696		1,691,350
Construction and land	110,940		17,048		7,369		2,213		137,570
Residential	1,886,273		—		8,072		11,744		1,906,089
Home equity	121,218		—		1,673		660		123,551
Consumer and other	149,155		—		—		95		149,250
Total	$	4,578,523	$	84,739	$	90,129	$	60,745	$	4,814,136

_____________________


(1)	Does not include five commercial and industrial special mention loans totaling $0.9 million and three commercial real estate special mention loans totaling $3.0 million in loans held for sale as of December 31, 2012.

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 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.



	As of and for the year ended December 31, 2012
	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	$	3,274	$	4,499	n/a		$	4,707	$	—
Commercial real estate	40,133		64,424		n/a		31,736		283
Construction and land	1,310		2,682		n/a		5,532		97
Residential	2,337		2,594		n/a		8,885		312
Home equity	360		360		n/a		355		3
Consumer and other	—		—		n/a		40		—
Subtotal	$	47,414	$	74,559	n/a		$	51,255	$	695
With an allowance recorded:
Commercial and industrial	$	1,149	$	1,191	$	118	$	1,855	$	1
Commercial real estate	18,519		19,814		1,667		24,510		727
Construction and land	903		953		189		1,486		—
Residential	13,539		13,798		1,403		11,781		374
Home equity	—		—		—		114		5
Consumer and other	—		—		—		—		—
Subtotal	$	34,110	$	35,756	$	3,377	$	39,746	$	1,107
Total:
Commercial and industrial	$	4,423	$	5,690	$	118	$	6,562	$	1
Commercial real estate	58,652		84,238		1,667		56,246		1,010
Construction and land	2,213		3,635		189		7,018		97
Residential	15,876		16,392		1,403		20,666		686
Home equity	360		360		—		469		8
Consumer and other	—		—		—		40		—
Total	$	81,524	$	110,315	$	3,377	$	91,001	$	1,802

____________________


(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 $54.5 million and $54.5 million at December 31, 2013 and 2012, respectively. Of the $54.5 million in TDRs at December 31, 2013, $28.4 million were on accrual status. Of the $54.5 million in TDRs at December 31, 2012, $26.7 million were on accrual status. As of December 31, 2013 and 2012, the Company had $0.1 million in commitments to lend additional funds to debtors for loans whose terms had been modified in a troubled debt restructuring.

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 year ended December 31, 2013
	Restructured Current Year to Date					TDRs that defaulted in 2013 that were restructured in a TDR in 2013
	# of Loans	Pre-modification recorded investment		Post-modification recorded investment		# of Loans	Post-modification recorded investment
	(In thousands, except number of loans)
Commercial and industrial (1)	3	$	1,369	$	1,369	1	$	983
Commercial real estate (2)	8	11,889		12,296		5	5,072
Construction and land (3)	4	3,604		3,604		3	3,690
Residential (4)	13	1,418		1,429		1	1,116
Home equity (5)	1	40		40		—	—
Consumer and other	—	—		—		—	—
Total	29	$	18,320	$	18,738	10	$	10,861

__________________


(1)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.0 million); temporary rate reduction (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); temporary rate reduction (1 loan; post-modification recorded investment of $0.9 million); and combination of concessions (3 loans; post-modification recorded investment of $2.4 million).


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


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


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



	As of and for the year ended December 31, 2012
	Restructured Current Year to Date					TDRs that defaulted in 2012 that were restructured in a TDR in 2012
	# of Loans	Pre-modification recorded investment		Post-modification recorded investment		# of Loans	Post-modification recorded investment
	(In thousands, except number of loans)
Commercial and industrial (1)	2	$	1,297	$	1,297	1	$	1,191
Commercial real estate (2)	11	11,664		11,657		—	—
Construction and land	—	—		—		—	—
Residential (3)	13	8,272		8,272		3	1,282
Home equity	—	—		—		—	—
Consumer and other	—	—		—		—	—
Total	26	$	21,233	$	21,226	4	$	2,473

__________________


(1)	Represents the following concessions: extension of term (1 loan; post-modification recorded investment of $1.2 million); and combination of concessions (1 loan; post-modification recorded investment of $0.1 million).


(2)	Represents the following concessions: extension of term (8 loans; post-modification recorded investment of $6.4 million); and combination of concessions (3 loans; post-modification recorded investment of $5.3 million).


(3)	Represents the following concessions: payment deferral (1 loan; post-modification recorded investment of $1.9 million); temporary rate reduction (10 loans; post-modification recorded investment of $4.0 million); and combination of concessions (2 loans; post-modification recorded investment of $2.4 million).

Any loans to senior management, executive officers, and directors are made in the ordinary course of business, under normal credit terms, including interest rates and collateral requirements prevailing at the time of origination for comparable transactions with other persons and do not represent more than normal credit risk. The Bank’s current policy is generally not to originate these types of loans. At December 31, 2013 and 2012, the Company had no loans outstanding to senior management, executive officers, and directors. At December 31, 2011, the Company had $9.5 million in loans outstanding to senior management, executive officers, and directors, all of which were repaid during 2012.

In addition, less than 1% of the Company’s loans as of December 31, 2013 and 2012 were made by the Holding Company and or non-banking affiliates. These loans totaled $0.1 million and $0.5 million as of December 31, 2013 and 2012, respectively. These loans were made at market rates and terms to certain principals of DGHM and BOS, and also related to the sale of a former affiliate.