4. LOANS

At September 30, 2014 and December 31, 2013, net loans disaggregated by class consisted of the following (in thousands):

	September 30, 2014			December 31, 2013
Commercial and industrial	$	180,399		$	171,199
Commercial real estate		512,341			464,560
Multifamily		274,352			184,624
Mixed use commercial		27,476			4,797
Real estate construction		21,615			6,565
Residential mortgages		185,856			169,552
Home equity		52,001			57,112
Consumer		8,021			10,439
Gross loans		1,262,061			1,068,848
Allowance for loan losses		(18,800	)		(17,263	)
Net loans at end of period	$	1,243,261		$	1,051,585

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

	Three months ended September 30, 2014												Three months ended September 30, 2013
	Balance at beginning of period		Charge- offs			Recoveries		(Credit) provision for loan losses			Balance at end of period		Balance at beginning of period		Charge- offs			Recoveries		(Credit) provision for loan losses			Balance at end of period
Commercial and industrial	$	2,932	$	(104	)	$	160	$	(1,121	)	$	1,867	$	4,778	$	(60	)	$	390	$	(1,870	)	$	3,238
Commercial real estate		7,899		-			11		(499	)		7,411		6,521		(70	)		12		611			7,074
Multifamily		2,444		-			-		238			2,682		529		-			-		903			1,432
Mixed use commercial		212		-			-		(6	)		206		180		-			-		(126	)		54
Real estate construction		230		-			-		36			266		278		-			-		(4	)		274
Residential mortgages		2,650		-			4		193			2,847		2,341		-			4		218			2,563
Home equity		761		-			3		(55	)		709		1,059		-			5		17			1,081
Consumer		166		(15	)		13		13			177		247		(11	)		56		(59	)		233
Unallocated		1,184		-			-		1,451			2,635		1,360		-			-		310			1,670
Total	$	18,478	$	(119	)	$	191	$	250		$	18,800	$	17,293	$	(141	)	$	467	$	-		$	17,619

	Nine months ended September 30, 2014												Nine months ended September 30, 2013
	Balance at beginning of period		Charge- offs			Recoveries		(Credit) provision for loan losses			Balance at end of period		Balance at beginning of period		Charge- offs			Recoveries		(Credit) provision for loan losses			Balance at end of period
Commercial and industrial	$	2,615	$	(419	)	$	663	$	(992	)	$	1,867	$	6,181	$	(1,687	)	$	1,600	$	(2,856	)	$	3,238
Commercial real estate		6,572		-			508		331			7,411		5,965		(70	)		85		1,094			7,074
Multifamily		2,159		-			-		523			2,682		150		-			-		1,282			1,432
Mixed use commercial		54		-			-		152			206		34		-			-		20			54
Real estate construction		88		-			-		178			266		141		-			-		133			274
Residential mortgages		2,463		(32	)		12		404			2,847		1,576		(74	)		5		1,056			2,563
Home equity		745		-			48		(84	)		709		907		-			7		167			1,081
Consumer		241		(19	)		26		(71	)		177		189		(133	)		105		72			233
Unallocated		2,326		-			-		309			2,635		2,638		-			-		(968	)		1,670
Total	$	17,263	$	(470	)	$	1,257	$	750		$	18,800	$	17,781	$	(1,964	)	$	1,802	$	-		$	17,619

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, mixed use commercial, 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 September 30, 2014 due to growth in the loan portfolio. The Company did not record a provision for loan losses in the third quarter of 2013.

For the three months ended September 30, 2014, the ending balance of the Company’s allowance for loan losses increased by $322 thousand when compared to June 30, 2014. During the third quarter of 2014, the Company decreased its allowance for loan losses allocated to commercial and industrial loans (“C&I”) and commercial real estate loans (“CRE”) by $1.1 million and $488 thousand, respectively, while increasing the amount allocated to multifamily loans by $238 thousand.

The reductions in the allowance for loan losses allocated to C&I and CRE loans were primarily due to decreases of 0.58% and 0.16%, respectively, versus June 30, 2014, in the ASC 450-20 average combined historical loss and environmental factors rates on unimpaired pass rated C&I and CRE loans, partially offset by increases of $2 million and $25 million, respectively, in the balances of such unimpaired pass rated loans.

The increase in the allowance for loan losses allocated to multifamily loans during the third quarter of 2014 largely reflected an increase of $29 million in the balance of unimpaired pass rated multifamily 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.

For the three months ended September 30, 2014, the ending balance of the Company’s unallocated portion of the allowance for loan losses increased $1.5 million versus June 30, 2014. Loan portfolio growth was strong during the third quarter of 2014, primarily in multifamily and CRE loans. Loan growth, including multifamily loans, is expected to continue throughout 2014. An unallocated portion of the reserve is considered a prudent option until these loans to new borrowers establish satisfactory payment patterns.

At September 30, 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 September 30, 2014 and December 31, 2013 disaggregated by class and impairment methodology (in thousands).

	Allowance for Loan Losses						Loan Balances
September 30, 2014	Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance		Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance
Commercial and industrial	$	21	$	1,846	$	1,867	$	6,536	$	173,863	$	180,399
Commercial real estate		-		7,411		7,411		10,215		502,126		512,341
Multifamily		-		2,682		2,682		-		274,352		274,352
Mixed use commercial		-		206		206		-		27,476		27,476
Real estate construction		-		266		266		-		21,615		21,615
Residential mortgages		706		2,141		2,847		5,182		180,674		185,856
Home equity		96		613		709		904		51,097		52,001
Consumer		92		85		177		327		7,694		8,021
Unallocated		-		2,635		2,635		-		-		-
Total	$	915	$	17,885	$	18,800	$	23,164	$	1,238,897	$	1,262,061

	Allowance for Loan Losses						Loan Balances
December 31, 2013	Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance		Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance
Commercial and industrial	$	41	$	2,574	$	2,615	$	7,754	$	163,445	$	171,199
Commercial real estate		-		6,572		6,572		11,821		452,739		464,560
Multifamily		-		2,159		2,159		-		184,624		184,624
Mixed use commercial		-		54		54		-		4,797		4,797
Real estate construction		-		88		88		-		6,565		6,565
Residential mortgages		709		1,754		2,463		5,049		164,503		169,552
Home equity		93		652		745		1,082		56,030		57,112
Consumer		102		139		241		284		10,155		10,439
Unallocated		-		2,326		2,326		-		-		-
Total	$	945	$	16,318	$	17,263	$	25,990	$	1,042,858	$	1,068,848

The following table presents the Company’s impaired loans disaggregated by class at September 30, 2014 and December 31, 2013 (in thousands).

	September 30, 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	$	6,473	$	6,473	$	-	$	6,711	$	6,711	$	-
Commercial real estate		10,633		10,215		-		12,239		11,821		-
Residential mortgages		2,452		2,323		-		2,305		2,176		-
Home equity		714		714		-		891		891		-
Consumer		139		139		-		25		9		-
Subtotal		20,411		19,864		-		22,171		21,608		-

With an allowance recorded:
Commercial and industrial		63		63		21		1,043		1,043		41
Residential mortgages		2,859		2,859		706		2,873		2,873		709
Home equity		327		190		96		328		191		93
Consumer		188		188		92		274		275		102
Subtotal		3,437		3,300		915		4,518		4,382		945
Total	$	23,848	$	23,164	$	915	$	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 and nine months ended September 30, 2014 and 2013 (in thousands). No interest income was recognized on a cash basis on impaired loans for the periods presented.

	Three Months Ended September 30,								Nine Months Ended September 30,
	2014				2013				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		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	$	7,061	$	128	$	12,695	$	47	$	7,304	$	679	$	12,799	$	279
Commercial real estate		10,424		49		8,406		224		11,045		204		8,635		369
Real estate construction		-		-		-		80		-		-		683		94
Residential mortgages		5,148		24		5,202		73		5,069		100		5,098		167
Home equity		811		6		1,174		4		767		26		1,092		8
Consumer		289		7		183		-		222		14		192		8
Total	$	23,733	$	214	$	27,660	$	428	$	24,407	$	1,023	$	28,499	$	925

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 $698 thousand and $586 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of September 30, 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 September 30, 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 September 30, 2014 and December 31, 2013 are as follows (dollars in thousands):

	September 30, 2014				December 31, 2013
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		36	$	4,926		43	$	6,022
Commercial real estate		8		10,172		7		6,022
Residential mortgages		19		4,089		17		3,891
Home equity		3		205		-		-
Consumer		7		285		3		150
Total		73	$	19,677		70	$	16,085

The following presents, disaggregated by class, information regarding TDRs executed during the three and nine months ended September 30, 2014 and 2013 (dollars in thousands):

	Three Months Ended September 30,
	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		-	$	-	$	-		1	$	228	$	228
Residential mortgages		-		-		-		1		19		19
Home equity		1		98		98		-		-		-
Consumer		1		46		46		-		-		-
Total		2	$	144	$	144		2	$	247	$	247

	Nine Months Ended September 30,
	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		10	$	1,877	$	1,877		5	$	1,120	$	1,120
Commercial real estate		2		5,161		5,161		-		-		-
Residential mortgages		3		273		273		4		924		924
Home equity		3		207		207		-		-		-
Consumer		4		145		145		1		17		17
Total		22	$	7,663	$	7,663		10	$	2,061	$	2,061

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 nine months ended September 30, 2014 and 2013 (dollars in thousands). There were no such loans during the three months ended September 30, 2014 and 2013.

	Nine Months Ended September 30,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted TDRs	of Loans		Balance		of Loans		Balance
Commercial real estate		2	$	1,536		-	$	-
Total		2	$	1,536		-	$	-

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 executed during the three and nine months ended September 30, 2014 and 2013 that are not considered TDRs (dollars in thousands):

	Three Months Ended September 30,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial and industrial		1	$	67		11	$	2,240
Commercial real estate		2		11,017		11		6,367
Multifamily		-		-		1		410
Total		3	$	11,084		23	$	9,017

	Nine Months Ended September 30,
	2014				2013
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Non-TDR Modifications	of Loans		Balance		of Loans		Balance
Commercial and industrial		1	$	67		19	$	6,741
Commercial real estate		14		34,798		31		32,485
Multifamily		-		-		1		410
Total		15	$	34,865		51	$	39,636

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

	September 30, 2014		December 31, 2013
Non-accrual loans	$	14,654	$	15,183
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	14,654	$	15,183
TDRs accruing interest	$	8,194	$	10,647
TDRs non-accruing	$	11,483	$	5,438

At September 30, 2014 and December 31, 2013, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	September 30, 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	$	4,946		33.7	%	$	180,399		0.4	%	$	5,014		33.0	%	$	171,199		0.4	%
Commercial real estate		6,650		45.4			512,341		0.5			7,492		49.3			464,560		0.7
Multifamily		-		-			274,352		-			-		-			184,624		-
Mixed use commercial		-		-			27,476		-			-		-			4,797		-
Real estate construction		-		-			21,615		-			-		-			6,565		-
Residential mortgages		2,457		16.8			185,856		0.2			1,897		12.5			169,552		0.2
Home equity		557		3.8			52,001		0.1			647		4.3			57,112		0.1
Consumer		44		0.3			8,021		-			133		0.9			10,439		-
Total	$	14,654		100.0	%	$	1,262,061		1.2	%	$	15,183		100.0	%	$	1,068,848		1.4	%

Additional interest income of approximately $185 thousand and $208 thousand would have been recorded during the three months ended September 30, 2014 and 2013, respectively, and $824 thousand and $894 thousand during the nine months ended September 30, 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):

	September 30, 2014				December 31, 2013
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	4,946	$	2,500	$	5,014	$	3,750
Commercial real estate		6,650		9,960		7,492		13,050
Residential mortgages		2,457		5,279		1,897		3,764
Home equity		557		3,476		647		3,072
Consumer		44		-		133		-
Total	$	14,654	$	21,215	$	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 September 30, 2014 and December 31, 2013, past due loans disaggregated by class were as follows (in thousands).

	Past Due
September 30, 2014	30 - 59 days			60 - 89 days			90 days and over			Total			Current			Total
Commercial and industrial	$	95		$	-		$	4,946		$	5,041		$	175,358		$	180,399
Commercial real estate		-			-			6,650			6,650			505,691			512,341
Multifamily		-			-			-			-			274,352			274,352
Mixed use commercial		-			-			-			-			27,476			27,476
Real estate construction		-			-			-			-			21,615			21,615
Residential mortgages		1,684			297			2,457			4,438			181,418			185,856
Home equity		1,014			75			557			1,646			50,355			52,001
Consumer		40			33			44			117			7,904			8,021
Total	$	2,833		$	405		$	14,654		$	17,892		$	1,244,169		$	1,262,061
% of Total Loans		0.2	%		0.0	%		1.2	%		1.4	%		98.6	%		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			456,437			464,560
Multifamily		-			-			-			-			184,624			184,624
Mixed use commercial		-			-			-			-			4,797			4,797
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	%

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 in this category 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 September 30, 2014 and December 31, 2013 (in thousands).

	September 30, 2014												December 31, 2013
	Grade												Grade
	Pass			Special mention			Substandard			Total			Pass			Special mention			Substandard			Total
Commercial and industrial	$	170,467		$	1,308		$	8,624		$	180,399		$	158,536		$	2,934		$	9,729		$	171,199
Commercial real estate		487,532			8,985			15,824			512,341			440,505			2,817			21,238			464,560
Multifamily		274,352			-			-			274,352			184,624			-			-			184,624
Mixed use commercial		27,476			-			-			27,476			4,797			-			-			4,797
Real estate construction		21,615			-			-			21,615			6,565			-			-			6,565
Residential mortgages		181,147			-			4,709			185,856			164,559			-			4,993			169,552
Home equity		51,347			-			654			52,001			56,379			-			733			57,112
Consumer		7,692			-			329			8,021			10,156			-			283			10,439
Total	$	1,221,628		$	10,293		$	30,140		$	1,262,061		$	1,026,121		$	5,751		$	36,976		$	1,068,848
% of Total		96.8	%		0.8	%		2.4	%		100.0	%		96.0	%		0.5	%		3.5	%		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.