4. LOANS

At March 31, 2014 and December 31, 2013, net loans disaggregated by class consisted of the following (in thousands):

	March 31, 2014			December 31, 2013
Commercial and industrial	$	165,019		$	171,199
Commercial real estate		489,958			469,357
Multifamily		221,841			184,624
Real estate construction		14,940			6,565
Residential mortgages		173,347			169,552
Home equity		55,250			57,112
Consumer		9,463			10,439
Gross loans		1,129,818			1,068,848
Allowance for loan losses		(17,737	)		(17,263	)
Net loans at end of period	$	1,112,081		$	1,051,585

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

Three months ended March 31, 2014
Balance at beginning of period	$	2,615		$	6,626		$	2,159	$	88	$	2,463	$	745		$	241		$	2,326		$	17,263
Charge-offs		(115	)		-			-		-		-		-			(2	)		-			(117	)
Recoveries		293			12			-		-		4		27			5			-			341
(Credit) provision for loan losses		(312	)		657			481		129		160		(54	)		(58	)		(753	)		250
Balance at end of period	$	2,481		$	7,295		$	2,640	$	217	$	2,627	$	718		$	186		$	1,573		$	17,737

Three months ended March 31, 2013
Balance at beginning of period	$	6,181		$	5,999		$	150	$	141	$	1,576	$	907		$	189		$	2,638		$	17,781
Charge-offs		(348	)		-			-		-		-		-			(11	)		-			(359	)
Recoveries		299			72			-		-		1		1			39			-			412
(Credit) provision for loan losses		(787	)		(353	)		702		704		864		16			28			(1,174	)		-
Balance at end of period	$	5,345		$	5,718		$	852	$	845	$	2,441	$	924		$	245		$	1,464		$	17,834

The allowance for loan losses is a valuation allowance for probable incurred credit losses. Loan losses are charged against the allowance when management believes a loan, in full or in part, is uncollectible. 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.

All non-accrual loans over $250 thousand in the commercial and industrial, commercial real estate and real estate construction loan classes and all TDRs are evaluated individually for impairment. All other loans are generally evaluated as homogeneous pools with similar risk characteristics. 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 Company recorded a $250 thousand provision for loan losses for the three months ended March 31, 2014 due to growth in the loan portfolio. The Company did not record a provision for loan losses in the first quarter of 2013.

For the three months ended March 31, 2014, the ending balance of the Company’s allowance for loan losses increased by $474 thousand when compared to December 31, 2013. During the first quarter of 2014, the Company increased its allowance for loan losses allocated to multifamily loans and commercial real estate loans (“CRE”) by $481 thousand and $669 thousand, respectively, while reducing the amount allocated to commercial and industrial loans (“C&I”) by $134 thousand.

The increases in the allowance for loan losses allocated to multifamily and CRE loans were primarily due to higher balances of unimpaired pass rated multifamily and CRE loans of $37 million and $23 million, respectively, versus December 31, 2013, coupled with increases of 0.01% and 0.08%, 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 the first quarter of 2014 reflected a $6 million decrease in the balance of unimpaired pass rated C&I loans, as well as a reduction of 0.02% in the ASC 450-20 historical loss factors rate on unimpaired pass rated C&I loans and a decrease of $9 thousand in specific reserves for C&I loans.

The ASC 450-20 loss factors rates incorporate a rolling twelve quarter look back period used in calculating historical losses for each loan segment. In an effort to more accurately represent the Company’s incurred and expected losses by individual loan segment, a twelve quarter period is used to improve the granularity of individual loan segment charge-off history and reduce the volatility associated with improperly weighting short-term trends in the calculation.

At March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 disaggregated by class and impairment methodology (in thousands).

March 31, 2014	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	$	32	$	-	$	-	$	-	$	711	$	94	$	62	$	-	$	899
Ending balance: collectively evaluated for impairment		2,449		7,295		2,640		217		1,916		624		124		1,573		16,838
Ending balance	$	2,481	$	7,295	$	2,640	$	217	$	2,627	$	718	$	186	$	1,573	$	17,737
Loan balances:
Ending balance: individually evaluated for impairment	$	7,468	$	11,220	$	-	$	-	$	4,987	$	681	$	155	$	-	$	24,511
Ending balance: collectively evaluated for impairment		157,551		478,738		221,841		14,940		168,360		54,569		9,308		-		1,105,307
Ending balance	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	-	$	1,129,818

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

The following table presents the Company’s impaired loans disaggregated by class at March 31, 2014 and December 31, 2013 (in thousands).

	March 31, 2014						December 31, 2013
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	7,314	$	7,314	$	-	$	6,711	$	6,711	$	-
Commercial real estate		11,638		11,220		-		12,239		11,821		-
Residential mortgages		2,258		2,130		-		2,305		2,176		-
Home equity		489		489		-		891		891		-
Consumer		25		9		-		25		9		-
Subtotal		21,724		21,162		-		22,171		21,608		-

With an allowance recorded:
Commercial and industrial		154		154		32		1,043		1,043		41
Residential mortgages		2,857		2,857		711		2,873		2,873		709
Home equity		328		192		94		328		191		93
Consumer		148		146		62		274		275		102
Subtotal		3,487		3,349		899		4,518		4,382		945
Total	$	25,211	$	24,511	$	899	$	26,689	$	25,990	$	945

The following table presents the Company’s average recorded investment in impaired loans and the related interest income recognized disaggregated by class for the three months ended March 31, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for the periods presented.

	Three Months Ended March 31,
	2014				2013
	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	$	7,567	$	107	$	10,947	$	57
Commercial real estate		11,558		99		11,090		69
Real estate construction		-		-		1,401		-
Residential mortgages		5,036		36		5,004		42
Home equity		771		17		751		3
Consumer		170		2		318		5
Total	$	25,102	$	261	$	29,511	$	176

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 $611 thousand and $586 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of March 31, 2014 and December 31, 2013, 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 was committed to be advanced in connection with TDRs at March 31, 2014 and December 31, 2013, 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 March 31, 2014 and December 31, 2013 are as follows (dollars in thousands):

	March 31, 2014				December 31, 2013
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		42	$	6,133		43	$	6,022
Commercial real estate		8		5,937		7		6,022
Residential mortgages		16		3,858		17		3,891
Consumer		3		148		3		150
Total		69	$	16,076		70	$	16,085

The following presents, disaggregated by class, information regarding TDRs executed during the three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014						2013
			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		3	$	377	$	377		2	$	320	$	320
Residential mortgages		-		-		-		3		905		905
Consumer		-		-		-		1		17		17
Total		3	$	377	$	377		6	$	1,242	$	1,242

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 three months ended March 31, 2014 and 2013 (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance
Commercial real estate		2	$	1,596		-	$	-
Total		2	$	1,596		-	$	-

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 three months ended March 31, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended March 31,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial real estate		3	$	1,422		11	$	19,703
Total		3	$	1,422		11	$	19,703

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

	March 31, 2014		December 31, 2013
Non-accrual loans	$	14,059	$	15,183
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	14,059	$	15,183
TDRs accruing interest	$	10,631	$	10,647
TDRs non-accruing	$	5,445	$	5,438

At March 31, 2014 and December 31, 2013, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	March 31, 2014										December 31, 2013
	Non- accrual loans		% of Total			Total Loans		% of Total Loans			Non- accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	4,843		34.4	%	$	165,019		0.4	%	$	5,014		33.0	%	$	171,199		0.4	%
Commercial real estate		6,936		49.3			489,958		0.6			7,492		49.3			469,357		0.7
Multifamily		-		-			221,841		-			-		-			184,624		-
Real estate construction		-		-			14,940		-			-		-			6,565		-
Residential mortgages		1,840		13.1			173,347		0.2			1,897		12.5			169,552		0.2
Home equity		431		3.1			55,250		-			647		4.3			57,112		0.1
Consumer		9		0.1			9,463		-			133		0.9			10,439		-
Total	$	14,059		100.0	%	$	1,129,818		1.2	%	$	15,183		100.0	%	$	1,068,848		1.4	%

Additional interest income of approximately $494 thousand and $406 thousand would have been recorded during the three months ended March 31, 2014 and 2013, respectively, if non-accrual loans had performed in accordance with their original terms.

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

	March 31, 2014				December 31, 2013
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	4,843	$	3,750	$	5,014	$	3,750
Commercial real estate		6,936		9,960		7,492		13,050
Residential mortgages		1,840		4,565		1,897		3,764
Home equity		431		975		647		3,072
Consumer		9		-		133		-
Total	$	14,059	$	19,250	$	15,183	$	23,636

(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.

At March 31, 2014 and December 31, 2013, past due loans disaggregated by class were as follows (in thousands).

	Past Due
March 31, 2014	30 - 59 days			60 - 89 days		90 days and over			Total			Current			Total
Commercial and industrial	$	159		$	83	$	4,843		$	5,085		$	159,934		$	165,019
Commercial real estate		979			-		6,936			7,915			482,043			489,958
Multifamily		-			-		-			-			221,841			221,841
Real estate construction		-			-		-			-			14,940			14,940
Residential mortgages		1,636			-		1,840			3,476			169,871			173,347
Home equity		807			24		431			1,262			53,988			55,250
Consumer		55			9		9			73			9,390			9,463
Total	$	3,636		$	116	$	14,059		$	17,811		$	1,112,007		$	1,129,818
% of Total Loans		0.3	%		-		1.3	%		1.6	%		98.4	%		100.0	%

	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	%		-		1.4	%		1.7	%		98.3	%		100.0	%

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 potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. 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 following presents the Company’s loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan at March 31, 2014 and December 31, 2013 (in thousands).

March 31, 2014	Commercial and industrial		Commercial real estate		Multifamily		Real estate construction		Residential mortgages		Home equity		Consumer		Total		% of Total
Grade:
Pass	$	152,091	$	468,449	$	221,841	$	14,940	$	168,755	$	54,819	$	9,306	$	1,090,201		96.5	%
Special mention		3,563		2,786		-		-		-		-		-		6,349		0.6
Substandard		9,365		18,723		-		-		4,592		431		157		33,268		2.9
Total	$	165,019	$	489,958	$	221,841	$	14,940	$	173,347	$	55,250	$	9,463	$	1,129,818		100.0	%

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	%

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.