4. LOANS

At December 31, 2013 and 2012, net loans disaggregated by class consisted of the following (in thousands):

	December 31, 2013			December 31, 2012
Commercial and industrial	$	171,199		$	168,709
Commercial real estate		469,357			360,010
Multifamily		184,624			9,261
Real estate construction		6,565			15,469
Residential mortgages		169,552			146,575
Home equity		57,112			66,468
Consumer		10,439			14,288
Gross loans		1,068,848			780,780
Allowance for loan losses		(17,263	)		(17,781	)
Net loans at end of period	$	1,051,585		$	762,999

The Bank’s real estate loans and loan commitments are primarily for properties located throughout Long Island, New York. Repayment of these loans is dependent in part upon the overall economic health of the Company’s market area and current real estate values. The Bank considers the credit circumstances, the nature of the project and loan to value ratios for all real estate loans.

The Bank makes loans to its directors and executive officers, and other related parties, in the ordinary course of its business. Loans made to directors and executive officers, either directly or indirectly, totaled $20 million and $21 million at December 31, 2013 and 2012, respectively. New loans totaling $52 million and $44 million were extended and payments of $53 million and $44 million were received during 2013 and 2012, respectively, on these loans.

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. Management estimates the allowance balance required using past loan loss experience, the nature and volume of the portfolio, information about specific borrower situations and estimated collateral values, economic conditions, and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired.

A loan is impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. Generally, TDRs are initially classified as non-accrual until sufficient time has passed to assess whether the restructured loan will continue to perform. Generally, the Company returns a TDR to accrual status upon six months of performance under the new terms.

Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

Management has determined that all TDRs and all non-accrual loans are impaired; however, non-accrual loans with an impaired balance of $250 thousand or less are evaluated under ASC 450 with other groups of smaller or homogeneous loans with similar risk characteristics. Management will use judgment to determine if there are other loans outside of these two categories that fit the definition of impaired. If a loan is impaired, a specific reserve may be recorded so that the loan is reported, net, at the present value of estimated future cash flows including balloon payments, if any, using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral. Large groups of homogeneous loans with smaller individual balances, such as consumer and residential real estate loans, are generally evaluated collectively for impairment, and accordingly, are not separately identified for impairment disclosures. TDRs are separately identified for impairment disclosures and are measured at the present value of estimated future cash flows using the loan’s effective rate at inception. If a TDR is considered to be collateral-dependent, the loan is reported at the fair value of the collateral net of estimated costs to sell. For TDRs that subsequently default, the Company determines the allowance amount in accordance with its accounting policy for the allowance for loan losses.

The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors. The historical loss experience is determined by loan class, and is based on the actual loss history experienced by the Company over a rolling twelve quarter period. This actual loss experience is supplemented with other qualitative factors based on the risks present for each loan class. These qualitative factors include consideration of the following: levels of and trends in delinquencies and impaired loans; levels of and trends in charge-offs and recoveries; trends in volume and terms of loans; effects of any changes in risk selection and underwriting standards; other changes in lending policies, procedures and practices; experience, ability, and depth of lending management and other relevant staff; local, regional and national economic trends and conditions; industry conditions; and effects of changes in credit concentrations. The following loan classes have been identified: commercial and industrial, commercial real estate, multifamily, real estate construction, residential mortgages, home equity and consumer loans.

The qualitative factors utilized by the Company in computing its allowance for loan losses are determined based on the various risk characteristics of each loan class. Relevant risk characteristics are as follows:

Commercial and industrial loans – Loans in this class are made to businesses. Generally these loans are secured by assets of the business and repayment is expected from the cash flows of the business. A weakened economy and resultant decreased consumer and/or business spending will have an effect on the credit quality in this loan class.

Commercial real estate loans – Loans in this class include income‑producing investment properties and owner-occupied real estate used for business purposes. The underlying properties are generally located largely in the Company’s primary market area. The cash flows of the income producing investment properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on credit quality. Generally, management seeks to obtain annual financial information for borrowers with loans in excess of $250 thousand in this category. In the case of owner-occupied real estate used for business purposes, a weakened economy and resultant decreased consumer and/or business spending will have an adverse effect on credit quality.

Multifamily loans – Loans in this class are primarily concentrated in the five boroughs of New York City and target buildings with stabilized rent flows. It has been well-established that the incidence of loss in multifamily loan transactions is lower than almost all other loan categories as their performance over time has shown limited defaults. The property value for these buildings is directly attributable to the cash flow from rents and the rate of return investors need on their invested capital. Rental rates are a function of demand for apartments and the vacancy rates in New York City have been at historical lows.

Real estate construction loans – Loans in this class primarily include land loans to local individuals, contractors and developers for developing the land for sale or for the purpose of making improvements thereon. Repayment is derived from sale of the lots/ units including any pre-sold units. Credit risk is affected by market conditions, time to sell at an adequate price and cost overruns. To a lesser extent this class includes commercial development projects the Company finances, which in most cases require interest only during construction, and then convert to permanent financing. Credit risk is affected by construction delays, cost overruns, market conditions and the availability of permanent financing, to the extent such permanent financing is not being provided by us.

Residential mortgages and home equity loans – Loans in these classes are made to and secured by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this loan class. The Bank generally does not originate loans with a loan-to-value ratio greater than 80% and does not grant sub-prime loans.

Consumer loans – Loans in this class may be either secured or unsecured and repayment is dependent on the credit quality of the individual borrower and, if applicable, sale of the collateral securing the loan (such as automobiles and manufactured homes). Therefore, the overall health of the economy, including unemployment rates and housing prices, will have a significant effect on the credit quality in this loan class.

For performing loans, an estimate of adequacy of the general component of the allowance is made by applying qualitative factors specific to the portfolio to the period-end balances. Consideration is also given to the type and collateral of the loans with particular attention paid to commercial real estate construction loans, due to the inherent risk of this type of loan. Specific and general reserves are available for any identified loss.

At December 31, 2013 and 2012, the ending balance in the allowance for loan losses disaggregated by class and impairment methodology is as follows (in thousands). Also in the tables below are total loans at December 31, 2013 and 2012 disaggregated by class and impairment methodology (in thousands).

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	41	$	-	$	-	$	-	$	709	$	93	$	102	$	-	$	945
Ending balance: collectively evaluated for impairment		2,574		6,626		2,159		88		1,754		652		139		2,326		16,318
Ending balance	$	2,615	$	6,626	$	2,159	$	88	$	2,463	$	745	$	241	$	2,326	$	17,263
Loan balances:
Ending balance: individually evaluated for impairment	$	7,754	$	11,821	$	-	$	-	$	5,049	$	1,082	$	284	$	-	$	25,990
Ending balance: collectively evaluated for impairment		163,445		457,536		184,624		6,565		164,503		56,030		10,155		-		1,042,858
Ending balance	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	-	$	1,068,848

December 31, 2012	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	340	$	22	$	-	$	1	$	575	$	86	$	-	$	-	$	1,024
Ending balance: collectively evaluated for impairment		5,841		5,977		150		140		1,001		821		189		2,638		16,757
Ending balance	$	6,181	$	5,999	$	150	$	141	$	1,576	$	907	$	189	$	2,638	$	17,781
Loan balances:
Ending balance: individually evaluated for impairment	$	10,369	$	9,443	$	-	$	1,961	$	4,660	$	502	$	21	$	-	$	26,956
Ending balance: collectively evaluated for impairment		158,340		350,567		9,261		13,508		141,915		65,966		14,267		-		753,824
Ending balance	$	168,709	$	360,010	$	9,261	$	15,469	$	146,575	$	66,468	$	14,288	$	-	$	780,780

At December 31, 2013 and 2012, past due loans disaggregated by class were as follows (in thousands).

	Past Due
December 31, 2013	30 - 59 days			60 - 89 days			90 days and over			Total			Current			Total
Commercial and industrial	$	13		$	-		$	5,014		$	5,027		$	166,172		$	171,199
Commercial real estate		631			-			7,492			8,123			461,234			469,357
Multifamily		-			-			-			-			184,624			184,624
Real estate construction		-			-			-			-			6,565			6,565
Residential mortgages		1,535			339			1,897			3,771			165,781			169,552
Home equity		795			100			647			1,542			55,570			57,112
Consumer		75			-			133			208			10,231			10,439
Total	$	3,049		$	439		$	15,183		$	18,671		$	1,050,177		$	1,068,848
% of Total Loans		0.3	%		0.0	%		1.4	%		1.7	%		98.3	%		100.0	%

	Past Due
December 31, 2012	30 - 59 days			60 - 89 days			90 days and over			Total			Current			Total
Commercial and industrial	$	6,591		$	1,274		$	6,529		$	14,394		$	154,315		$	168,709
Commercial real estate		1,145			329			5,192			6,666			353,344			360,010
Multifamily		-			-			-			-			9,261			9,261
Real estate construction		1,382			-			1,961			3,343			12,126			15,469
Residential mortgages		2,867			6			2,466			5,339			141,236			146,575
Home equity		261			100			266			627			65,841			66,468
Consumer		189			18			21			228			14,060			14,288
Total	$	12,435		$	1,727		$	16,435		$	30,597		$	750,183		$	780,780
% of Total Loans		1.6	%		0.2	%		2.1	%		3.9	%		96.1	%		100.0	%

The following table presents the Company’s impaired loans disaggregated by class for the years ended December 31, 2013 and 2012 (in thousands).

	December 31, 2013						December 31, 2012
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	6,711	$	6,711	$	-	$	7,913	$	7,492	$	-
Commercial real estate		12,239		11,821		-		8,859		7,282		-
Real estate construction		-		-		-		1,334		1,305		-
Residential mortgages		2,305		2,176		-		1,918		1,788		-
Home equity		891		891		-		418		416		-
Consumer		25		9		-		21		21		-
Subtotal		22,171		21,608		-		20,463		18,304		-

With an allowance recorded:
Commercial and industrial		1,043		1,043		41		2,884		2,877		340
Commercial real estate		-		-		-		2,161		2,161		22
Real estate construction		-		-		-		656		656		1
Residential mortgages		2,873		2,873		709		3,015		2,872		575
Home equity		328		191		93		86		86		86
Consumer		274		275		102		-		-		-
Subtotal		4,518		4,382		945		8,802		8,652		1,024
Total	$	26,689	$	25,990	$	945	$	29,265	$	26,956	$	1,024

The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the years ended December 31, 2013, 2012 and 2011 (in thousands). No interest income was recognized on a cash basis on impaired loans for any of the periods presented.

	Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans
Commercial and industrial	$	12,065	$	800	$	23,215	$	447	$	25,179	$	1,422
Commercial real estate		11,556		1,041		38,477		501		55,449		2,970
Real estate construction		488		114		13,681		410		30,641		-
Residential mortgages		4,970		102		9,538		127		6,956		-
Home equity		814		15		2,607		13		3,369		-
Consumer		235		22		429		-		337		-
Total	$	30,128	$	2,094	$	87,947	$	1,498	$	121,931	$	4,392

The following table presents a summary of non-performing assets for each period (in thousands):

	December 31, 2013		December 31, 2012
Non-accrual loans	$	15,183	$	16,435
Non-accrual loans held-for-sale		-		907
Loans 90 days past due and still accruing		-		-
OREO		-		1,572
Total non-performing assets	$	15,183	$	18,914
TDRs accruing interest	$	10,647	$	9,954
TDRs non-accruing	$	5,438	$	6,650

At December 31, 2013 and 2012, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	December 31, 2013										December 31, 2012
	Non- accrual loans		% of Total			Total Loans		% of Total Loans			Non- accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	5,014		33.0	%	$	171,199		0.4	%	$	6,529		39.8	%	$	168,709		0.8	%
Commercial real estate		7,492		49.3			469,357		0.7			5,192		31.6			360,010		0.7
Multifamily		-		-			184,624		-			-		-			9,261		-
Real estate construction		-		-			6,565		-			1,961		11.9			15,469		0.3
Residential mortgages		1,897		12.5			169,552		0.2			2,466		15.0			146,575		0.3
Home equity		647		4.3			57,112		0.1			266		1.6			66,468		-
Consumer		133		0.9			10,439		-			21		0.1			14,288		-
Total	$	15,183		100.0	%	$	1,068,848		1.4	%	$	16,435		100.0	%	$	780,780		2.1	%

The following table presents the collateral value securing non-accrual loans for each period (in thousands):

	December 31, 2013				December 31, 2012
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	5,014	$	3,750	$	6,529	$	4,400
Commercial real estate		7,492		13,050		5,192		12,675
Real estate construction		-		-		1,961		3,661
Residential mortgages		1,897		3,764		2,466		5,141
Home equity		647		3,072		266		849
Consumer		133		-		21		-
Total	$	15,183	$	23,636	$	16,435	$	26,726

(1) Repayment of commercial and industrial loans is expected primarily from the cash flow of the business. The collateral typically securing these loans is a lien on all corporate assets via a blanket UCC filing and does not usually include real estate. For purposes of this disclosure, the Company has ascribed no value to the non-real estate collateral for this class of loans.

Additional interest income of approximately $521 thousand, $854 thousand and $4.3 million would have been recorded during the years ended December 31, 2013, 2012 and 2011, respectively, if non-accrual loans had performed in accordance with their original terms.

The following summarizes the activity in the allowance for loan losses disaggregated by class for the periods indicated (in thousands):

	Commercial and industrial			Commercial real estate			Multifamily		Real estate construction			Residential mortgages			Home equity			Consumer			Unallocated			Total
Year ended December 31, 2013
Balance at beginning of period	$	6,181		$	5,999		$	150	$	141		$	1,576		$	907		$	189		$	2,638		$	17,781
Charge-offs		(2,867	)		(383	)		-		-			(126	)		(558	)		(166	)		-			(4,100	)
Recoveries		2,077			97			-		-			5			32			121			-			2,332
(Credit) provision for loan losses		(2,776	)		913			2,009		(53	)		1,008			364			97			(312	)		1,250
Balance at end of period	$	2,615		$	6,626		$	2,159	$	88		$	2,463		$	745		$	241		$	2,326		$	17,263

	Commercial and industrial			Commercial real estate			Multifamily			Real estate construction			Residential mortgages			Home equity			Consumer			Unallocated		Total
Year ended December 31, 2012
Balance at beginning of period	$	25,047		$	10,470		$	559		$	623		$	2,401		$	512		$	313		$	33	$	39,958
Charge-offs		(8,534	)		(15,794	)		-			(3,671	)		(3,727	)		(1,953	)		(267	)		-		(33,946	)
Recoveries		2,456			-			-			340			115			246			112			-		3,269
(Credit) provision for loan losses		(12,788	)		11,323			(409	)		2,849			2,787			2,102			31			2,605		8,500
Balance at end of period	$	6,181		$	5,999		$	150		$	141		$	1,576		$	907		$	189		$	2,638	$	17,781

	Commercial and industrial			Commercial real estate			Multifamily		Real estate construction			Residential mortgages			Home equity			Consumer			Unallocated		Total
Year ended December 31, 2011
Balance at beginning of period	$	13,826		$	9,149		$	77	$	3,177		$	519		$	1,392		$	279		$	-	$	28,419
Charge-offs		(9,490	)		(4,059	)		-		(232	)		(411	)		(191	)		(214	)		-		(14,597	)
Recoveries		781			-			-		415			3			2			97			-		1,298
Reclass to allowance for off-balance sheet credit risk		-			(50	)		-		-			-			-			-			-		(50	)
Provision (credit) for loan losses		19,930			5,430			482		(2,737	)		2,290			(691	)		151			33		24,888
Balance at end of period	$	25,047		$	10,470		$	559	$	623		$	2,401		$	512		$	313		$	33	$	39,958

The Company recorded a $1.3 million consolidated provision for loan losses for the year ended December 31, 2013 as compared to a provision of $8.5 million for the year ended December 31, 2012. The decrease in the 2013 provision for loan losses resulted from a significant reduction in the level of criticized and classified loans.

For the year ended December 31, 2013, the ending balance of the Company’s allowance for loan losses decreased by $518 thousand when compared to December 31, 2012. During 2013, the Company increased its allowance for loan losses allocated to multifamily loans and commercial real estate loans (“CRE”) by $2.0 million and $627 thousand, respectively, while reducing the amount allocated to commercial and industrial loans (“C&I”) by $3.6 million.

The increases in the allowance for loan losses allocated to multifamily and CRE loans were primarily due to increases in the balances of unimpaired pass rated multifamily and CRE loans of $175 million and $143 million, respectively, versus December 31, 2012, partially offset by reductions of 0.39% and 0.24%, respectively, in the ASC 450-20 historical loss factors rates for such unimpaired pass rated loans.

The decrease in the allowance for loan losses allocated to C&I loans during 2013 reflected a 2.18% reduction in the ASC 450-20 historical loss factors rate on unimpaired pass rated C&I loans and a decrease of $299 thousand in specific reserves for C&I loans as computed under ASC 310-10, partially offset by a $15 million increase in the balance of unimpaired pass rated C&I loans in 2013.

Effective with the March 31, 2013 calculation, the ASC 450-20 loss factors rates incorporate an expansion of the look back period used in calculating historical losses to a rolling twelve quarter period (from an eight quarter period) for each loan segment. This change resulted from the Company’s effort to improve the granularity of its individual loan segment charge-off history. Additionally, the expansion of the look back period reduces the volatility associated with improperly weighting short-term trends in this calculation. These changes more accurately represent the Company’s incurred and expected losses by individual loan segment.

The Bank utilizes an eight-grade risk-rating system for commercial and industrial loans, commercial real estate and construction loans. Loans in risk grades 1- 4 are considered pass loans. The Bank’s risk grades are as follows:

Risk Grade 1, Excellent - Loans secured by liquid collateral such as certificates of deposit, reputable bank letters of credit, or other cash equivalents; loans that are guaranteed or otherwise backed by the full faith and credit of the United States government or an agency thereof, such as the Small Business Administration; or loans to any publicly held company with a current long-term debt rating of A or better.

Risk Grade 2, Good - Loans to businesses that have strong financial statements containing an unqualified opinion from a CPA firm and at least three consecutive years of profits; loans supported by un-audited financial statements containing strong balance sheets, five consecutive years of profits, a five-year satisfactory relationship with the Bank, and key balance sheet and income statement trends that are either stable or positive; loans secured by publicly traded marketable securities where there is no impediment to liquidation; loans to individuals backed by liquid personal assets, established credit history, and unquestionable character; or loans to publicly held companies with current long-term debt ratings of Baa or better.

Risk Grade 3, Satisfactory - Loans supported by financial statements (audited or un-audited) that indicate average or slightly below average risk and having some deficiency or vulnerability to changing economic conditions; loans with some weakness but offsetting features of other support are readily available; loans that are meeting the terms of repayment, but which may be susceptible to deterioration if adverse factors are encountered. Loans may be graded Satisfactory when there is no recent information on which to base a current risk evaluation and the following conditions apply:

At inception, the loan was properly underwritten, did not possess an unwarranted level of credit risk, and the loan met the above criteria for a risk grade of Excellent, Good, or Satisfactory.

At inception, the loan was secured with collateral possessing a loan value adequate to protect the Bank from loss.

The loan has exhibited two or more years of satisfactory repayment with a reasonable reduction of the principal balance.

During the period that the loan has been outstanding, there has been no evidence of any credit weakness. Some examples of weakness include slow payment, lack of cooperation by the borrower, breach of loan covenants or the borrower is in an industry known to be experiencing problems. If any of these credit weaknesses is observed, a lower risk grade may be warranted.

Risk Grade 4, Satisfactory/Monitored - Loans in this category are considered to be of acceptable credit quality, but contain greater credit risk than satisfactory loans due to weak balance sheets, marginal earnings or cash flow, or other uncertainties. These loans warrant a higher than average level of monitoring to ensure that weaknesses do not advance. The level of risk in a Satisfactory/Monitored loan is within acceptable underwriting guidelines so long as the loan is given the proper level of management supervision.

Risk Grade 5, Special Mention - Loans which possess some credit deficiency or potential weakness which deserves close attention. Such loans pose an unwarranted financial risk that, if not corrected, could weaken the loan by adversely impacting the future repayment ability of the borrower. The key distinctions of a Special Mention classification are that (1) it is indicative of an unwarranted level of risk and (2) weaknesses are considered potential, not defined, impairments to the primary source of repayment.

Risk Grade 6, Substandard - One or more of the following characteristics may be exhibited in loans classified Substandard:

Loans which possess a defined credit weakness. The likelihood that a loan will be paid from the primary source of repayment is uncertain. Financial deterioration is under way and very close attention is warranted to ensure that the loan is collected without loss.

Loans are inadequately protected by the current net worth and paying capacity of the obligor.

The primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment, such as collateral liquidation or guarantees.

Loans have a distinct possibility that the Bank will sustain some loss if deficiencies are not corrected.

Unusual courses of action are needed to maintain a high probability of repayment.

The borrower is not generating enough cash flow to repay loan principal; however, it continues to make interest payments.

The lender is forced into a subordinated or unsecured position due to flaws in documentation.

Loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to the normal loan terms.

The lender is seriously contemplating foreclosure or legal action due to the apparent deterioration in the loan.

There is a significant deterioration in market conditions to which the borrower is highly vulnerable.

Risk Grade 7, Doubtful - One or more of the following characteristics may be present in loans classified Doubtful:

Loans have all of the weaknesses of those classified as Substandard. However, based on existing conditions, these weaknesses make full collection of principal highly improbable.

The primary source of repayment is gone, and there is considerable doubt as to the quality of the secondary source of repayment.

The possibility of loss is high but because of certain important pending factors which may strengthen the loan, loss classification is deferred until the exact status of repayment is known.

Risk Grade 8, Loss - Loans are considered uncollectible and of such little value that continuing to carry them as assets is not feasible. Loans will be classified Loss when it is neither practical nor desirable to defer writing off or reserving all or a portion of a basically worthless asset, even though partial recovery may be possible at some time in the future.

The Bank annually reviews the ratings on all commercial and industrial, commercial real estate and real estate construction loans greater than $1 million. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within these loan classes. Management uses the results of these reviews as part of its ongoing review process.

The following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at December 31, 2013 and 2012 (in thousands).

December 31, 2013	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	158,536	$	445,302	$	184,624	$	6,565	$	164,559	$	56,379	$	10,156	$	1,026,121		96.0	%
Special mention		2,934		2,817		-		-		-		-		-		5,751		0.5
Substandard		9,729		21,238		-		-		4,993		733		283		36,976		3.5
Total	$	171,199	$	469,357	$	184,624	$	6,565	$	169,552	$	57,112	$	10,439	$	1,068,848		100.0	%

December 31, 2012	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	143,804	$	301,862	$	9,261	$	4,790	$	141,915	$	65,966	$	14,267	$	681,865		87.3	%
Special mention		5,995		38,670		-		-		-		-		-		44,665		5.7
Substandard		18,910		19,478		-		10,679		4,660		502		21		54,250		7.0
Total	$	168,709	$	360,010	$	9,261	$	15,469	$	146,575	$	66,468	$	14,288	$	780,780		100.0	%

TDRs are modifications or renewals where the Company has granted a concession to a borrower in financial distress. The Company reviews all modifications and renewals for determination of TDR status. The Company allocated $586 thousand and $800 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of December 31, 2013 and 2012, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of default by meeting a lower payment requirement based upon their current cash flow. These may also include loans that renewed at existing contractual rates, but below market rates for comparable credit.

A total of $250 thousand and $35 thousand were committed to be advanced in connection with TDRs as of December 31, 2013 and 2012, respectively, representing the amount the Company is legally required to advance under existing loan agreements. These loans are not in default under the terms of the loan agreements and are accruing interest. It is the Company’s policy to evaluate advances on such loans on a case by case basis. Absent a legal obligation to advance pursuant to the terms of the loan agreement, the Company generally will not advance funds for which it has outstanding commitments, but may do so in certain circumstances.

Outstanding TDRs, disaggregated by class, at December 31, 2013 and 2012 are as follows (dollars in thousands):

	December 31, 2013				December 31, 2012
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		43	$	6,022		41	$	6,468
Commercial real estate		7		6,022		9		6,238
Residential mortgages		17		3,891		15		3,587
Consumer		3		150		5		311
Total		70	$	16,085		70	$	16,604

The following presents, disaggregated by class, information regarding TDRs executed during the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

	For the year ended December 31, 2013						For the year ended December 31, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
New TDRs	Loans		Balance		Balance		Loans		Balance		Balance
Commercial and industrial		8	$	2,484	$	2,484		17	$	6,674	$	6,674
Commercial real estate		3		3,025		3,025		-		-		-
Residential mortgages		4		924		924		6		1,617		1,617
Consumer		1		17		17		1		49		49
Total		16	$	6,450	$	6,450		24	$	8,340	$	8,340

	For the year ended December 31, 2011
			Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
New TDRs	Loans		Balance		Balance
Commercial and industrial		29	$	4,099	$	4,123
Commercial real estate		8		8,697		8,697
Residential mortgages		5		1,437		1,622
Home equity		1		291		291
Consumer		1		34		34
Total		44	$	14,558	$	14,767

Presented below and disaggregated by class is information regarding loans modified as TDRs that had payment defaults of 90 days or more within twelve months of restructuring during the years ended December 31, 2013, 2012 and 2011 (dollars in thousands):

	Year ended December 31, 2013				Year ended December 31, 2012				Year ended December 31, 2011
			Outstanding				Outstanding				Outstanding
	Number		Recorded		Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance		of Loans		Balance
Commercial and industrial		-	$	-		2	$	1,125		9	$	41
Commercial real estate		1		390		-		-		2		4,879
Residential mortgages		1		310		2		807		-		-
Total		2	$	700		4	$	1,932		11	$	4,920

Not all loan modifications are TDRs. In some cases, the Company might provide a concession, such as a reduction in interest rate, but the borrower is not experiencing financial distress. This could be the case if the Company is matching a competitor’s interest rate.

The following presents information regarding modifications and renewals executed during the years ended December 31, 2013, 2012 and 2011 that are not considered TDRs (dollars in thousands):

	Year ended December 31, 2013				Year ended December 31, 2012				Year ended December 31, 2011
			Outstanding				Outstanding				Outstanding
	Number		Recorded		Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance		of Loans		Balance
Commercial and industrial		19	$	6,741		13	$	8,111		-	$	-
Commercial real estate		41		40,004		34		40,004		5		1,599
Multifamily		1		410		-		-		-		-
Total		61	$	47,155		47	$	48,115		5	$	1,599