4. LOANS

At June 30, 2015 and December 31, 2014, net loans disaggregated by class consisted of the following (in thousands):

	June 30, 2015			December 31, 2014
Commercial and industrial	$	196,881		$	177,813
Commercial real estate		598,866			560,524
Multifamily		361,309			309,666
Mixed use commercial		50,372			34,806
Real estate construction		31,628			26,206
Residential mortgages		182,828			187,828
Home equity		48,298			50,982
Consumer		6,444			7,602
Gross loans		1,476,626			1,355,427
Allowance for loan losses		(20,051	)		(19,200	)
Net loans at end of period	$	1,456,575		$	1,336,227

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

	Three Months Ended June 30, 2015												Three Months Ended June 30, 2014
	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		Provision (credit) for loan losses			Balance at end of period
Commercial and industrial	$	1,998	$	-		$	693	$	(618	)	$	2,073	$	2,481	$	(200	)	$	210	$	441		$	2,932
Commercial real estate		7,352		-			11		(1,363	)		6,000		7,208		-			485		206			7,899
Multifamily		4,467		-			-		(402	)		4,065		2,640		-			-		(196	)		2,444
Mixed use commercial		273		-			-		192			465		87		-			-		125			212
Real estate construction		360		-			-		118			478		217		-			-		13			230
Residential mortgages		2,618		-			16		(63	)		2,571		2,627		(32	)		4		51			2,650
Home equity		728		-			5		(61	)		672		718		-			18		25			761
Consumer		155		(9	)		10		(6	)		150		186		(2	)		8		(26	)		166
Unallocated		1,374		-			-		2,203			3,577		1,573		-			-		(389	)		1,184
Total	$	19,325	$	(9	)	$	735	$	-		$	20,051	$	17,737	$	(234	)	$	725	$	250		$	18,478

	Six Months Ended June 30, 2015												Six Months Ended June 30, 2014
	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		Provision (credit) for loan losses			Balance at end of period
Commercial and industrial	$	1,560	$	(492	)	$	1,036	$	(31	)	$	2,073	$	2,615	$	(315	)	$	503	$	129		$	2,932
Commercial real estate		6,777		-			18		(795	)		6,000		6,572		-			497		830			7,899
Multifamily		4,018		-			-		47			4,065		2,159		-			-		285			2,444
Mixed use commercial		261		-			-		204			465		54		-			-		158			212
Real estate construction		383		-			-		95			478		88		-			-		142			230
Residential mortgages		3,027		-			27		(483	)		2,571		2,463		(32	)		8		211			2,650
Home equity		709		-			7		(44	)		672		745		-			45		(29	)		761
Consumer		166		(10	)		15		(21	)		150		241		(4	)		13		(84	)		166
Unallocated		2,299		-			-		1,278			3,577		2,326		-			-		(1,142	)		1,184
Total	$	19,200	$	(502	)	$	1,103	$	250		$	20,051	$	17,263	$	(351	)	$	1,066	$	500		$	18,478

Factors considered by management in determining loan 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.

The general component of the allowance covers non-impaired loans and is based on historical loss experience, adjusted for qualitative factors. 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.

At June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014 disaggregated by class and impairment methodology (in thousands).

	Allowance for Loan Losses						Loan Balances
June 30, 2015	Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance		Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance
Commercial and industrial	$	5	$	2,068	$	2,073	$	2,848	$	194,033	$	196,881
Commercial real estate		-		6,000		6,000		5,357		593,509		598,866
Multifamily		-		4,065		4,065		-		361,309		361,309
Mixed use commercial		-		465		465		-		50,372		50,372
Real estate construction		-		478		478		-		31,628		31,628
Residential mortgages		779		1,792		2,571		5,639		177,189		182,828
Home equity		158		514		672		1,664		46,634		48,298
Consumer		85		65		150		392		6,052		6,444
Unallocated		-		3,577		3,577		-		-		-
Total	$	1,027	$	19,024	$	20,051	$	15,900	$	1,460,726	$	1,476,626

	Allowance for Loan Losses						Loan Balances
December 31, 2014	Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance		Individually evaluated for impairment		Collectively evaluated for impairment		Ending balance
Commercial and industrial	$	16	$	1,544	$	1,560	$	4,889	$	172,924	$	177,813
Commercial real estate		-		6,777		6,777		10,214		550,310		560,524
Multifamily		-		4,018		4,018		-		309,666		309,666
Mixed use commercial		-		261		261		-		34,806		34,806
Real estate construction		-		383		383		-		26,206		26,206
Residential mortgages		809		2,218		3,027		5,422		182,406		187,828
Home equity		92		617		709		1,567		49,415		50,982
Consumer		88		78		166		323		7,279		7,602
Unallocated		-		2,299		2,299		-		-		-
Total	$	1,005	$	18,195	$	19,200	$	22,415	$	1,333,012	$	1,355,427

The following table presents the Company’s impaired loans disaggregated by class at June 30, 2015 and December 31, 2014 (in thousands).

	June 30, 2015						December 31, 2014
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	2,808	$	2,808	$	-	$	4,833	$	4,833	$	-
Commercial real estate		5,775		5,357		-		10,632		10,214		-
Residential mortgages		2,084		1,955		-		1,645		1,516		-
Home equity		1,402		1,402		-		1,377		1,377		-
Consumer		212		212		-		137		137		-
Subtotal		12,281		11,734		-		18,624		18,077		-

With an allowance recorded:
Commercial and industrial		41		40		5		57		56		16
Residential mortgages		3,684		3,684		779		3,906		3,906		809
Home equity		398		262		158		326		190		92
Consumer		180		180		85		185		186		88
Subtotal		4,303		4,166		1,027		4,474		4,338		1,005
Total	$	16,584	$	15,900	$	1,027	$	23,098	$	22,415	$	1,005

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 six months ended June 30, 2015 and 2014 (in thousands). No interest income was recognized on a cash basis on impaired loans for any of the periods presented. The interest income recognized on accruing impaired loans is shown in the following table.

	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
	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	$	3,170	$	226	$	7,290	$	292	$	3,857	$	259	$	7,428	$	551
Commercial real estate		9,461		549		11,167		56		9,832		599		11,361		155
Residential mortgages		5,644		41		5,021		40		5,528		79		5,028		76
Home equity		1,666		15		720		3		1,664		28		745		20
Consumer		395		3		204		5		389		6		188		7
Total	$	20,336	$	834	$	24,402	$	396	$	21,270	$	971	$	24,750	$	809

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 $747 thousand and $790 thousand of specific reserves to customers whose loan terms have been modified as TDRs as of June 30, 2015 and December 31, 2014, 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 $45 thousand and $100 thousand were committed to be advanced in connection with TDRs as of June 30, 2015 and December 31, 2014, 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 June 30, 2015 and December 31, 2014 are as follows (dollars in thousands):

	June 30, 2015				December 31, 2014
TDRs Outstanding	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial and industrial		24	$	1,885		31	$	3,683
Commercial real estate		6		5,126		8		10,179
Residential mortgages		20		4,444		19		4,314
Home equity		5		1,204		5		1,216
Consumer		7		273		7		281
Total		62	$	12,932		70	$	19,673

The following presents, disaggregated by class, information regarding TDRs executed during the three and six months ended June 30, 2015 and 2014 (dollars in thousands):

	Three Months Ended June 30,
	2015						2014
New TDRs	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial		1	$	323	$	323		7	$	1,500	$	1,500
Commercial real estate		-		-		-		2		5,161		5,161
Residential mortgages		-		-		-		3		273		273
Home equity		-		-		-		2		109		109
Consumer		-		-		-		3		99		99
Total		1	$	323	$	323		17	$	7,142	$	7,142

	Six Months Ended June 30,
	2015						2014
New TDRs	Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance		Number of Loans		Pre-Modification Outstanding Recorded Balance		Post-Modification Outstanding Recorded Balance
Commercial and industrial		2	$	335	$	335		10	$	1,877	$	1,877
Commercial real estate		-		-		-		2		5,161		5,161
Residential mortgages		2		194		199		3		273		273
Home equity		-		-		-		2		109		109
Consumer		-		-		-		3		99		99
Total		4	$	529	$	534		20	$	7,519	$	7,519

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 and six months ended June 30, 2015 and 2014 (dollars in thousands).

	Three Months Ended June 30,								Six Months Ended June 30,
	2015				2014				2015				2014
Defaulted TDRs	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance
Commercial real estate		-	$	-		-	$	-		-	$	-		2	$	1,566
Consumer		1		46		-		-		1		46		-		-
Total		1	$	46		-	$	-		1	$	46		2	$	1,566

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

	June 30, 2015		December 31, 2014
Non-accrual loans	$	5,529	$	12,981
Non-accrual loans held for sale		-		-
Loans 90 days past due and still accruing		-		-
OREO		-		-
Total non-performing assets	$	5,529	$	12,981
TDRs accruing interest	$	10,091	$	9,380
TDRs non-accruing	$	2,841	$	10,293

At June 30, 2015 and December 31, 2014, non-accrual loans disaggregated by class were as follows (dollars in thousands):

	June 30, 2015										December 31, 2014
	Non-accrual loans		% of Total			Total Loans		% of Total Loans			Non-accrual loans		% of Total			Total Loans		% of Total Loans
Commercial and industrial	$	1,785		32.3	%	$	196,881		0.1	%	$	4,060		31.3	%	$	177,813		0.3	%
Commercial real estate		1,759		31.8			598,866		0.1			6,556		50.5			560,524		0.5
Multifamily		-		-			361,309		-			-		-			309,666		-
Mixed use commercial		-		-			50,372		-			-		-			34,806		-
Real estate construction		-		-			31,628		-			-		-			26,206		-
Residential mortgages		1,465		26.5			182,828		0.1			2,020		15.6			187,828		0.1
Home equity		355		6.4			48,298		0.1			303		2.3			50,982		0.1
Consumer		165		3.0			6,444		-			42		0.3			7,602		-
Total	$	5,529		100.0	%	$	1,476,626		0.4	%	$	12,981		100.0	%	$	1,355,427		1.0	%

Additional interest income of approximately $83 thousand and $145 thousand would have been recorded during the three months ended June 30, 2015 and 2014, respectively, and $171 thousand and $639 thousand during the six months ended June 30, 2015 and 2014, respectively, if non-accrual loans had performed in accordance with their original terms.

At June 30, 2015 and December 31, 2014, past due loans disaggregated by class were as follows (in thousands).

	Past Due
June 30, 2015	30 - 59 days			60 - 89 days			90 days and over			Total			Current			Total
Commercial and industrial	$	-		$	2,578		$	1,785		$	4,363		$	192,518		$	196,881
Commercial real estate		-			-			1,759			1,759			597,107			598,866
Multifamily		-			-			-			-			361,309			361,309
Mixed use commercial		-			-			-			-			50,372			50,372
Real estate construction		-			-			-			-			31,628			31,628
Residential mortgages		1,196			348			1,465			3,009			179,819			182,828
Home equity		496			-			355			851			47,447			48,298
Consumer		-			-			165			165			6,279			6,444
Total	$	1,692		$	2,926		$	5,529		$	10,147		$	1,466,479		$	1,476,626
% of Total Loans		0.1	%		0.2	%		0.4	%		0.7	%		99.3	%		100.0	%

	Past Due
December 31, 2014	30 - 59 days			60 - 89 days			90 days and over			Total			Current			Total
Commercial and industrial	$	52		$	241		$	4,060		$	4,353		$	173,460		$	177,813
Commercial real estate		-			-			6,556			6,556			553,968			560,524
Multifamily		-			-			-			-			309,666			309,666
Mixed use commercial		-			-			-			-			34,806			34,806
Real estate construction		-			-			-			-			26,206			26,206
Residential mortgages		822			-			2,020			2,842			184,986			187,828
Home equity		-			112			303			415			50,567			50,982
Consumer		59			77			42			178			7,424			7,602
Total	$	933		$	430		$	12,981		$	14,344		$	1,341,083		$	1,355,427
% of Total Loans		0.1	%		0.0	%		1.0	%		1.1	%		98.9	%		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 Bank annually reviews the ratings on all loans greater than $750 thousand. Semi-annually, the Bank engages an independent third-party to review a significant portion of loans within the commercial and industrial, commercial real estate and real estate construction 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 June 30, 2015 and December 31, 2014 (in thousands).

	June 30, 2015												December 31, 2014
	Grade												Grade
	Pass			Special mention			Substandard			Total			Pass			Special mention			Substandard			Total
Commercial and industrial	$	182,614		$	3,898		$	10,369		$	196,881		$	167,922		$	1,225		$	8,666		$	177,813
Commercial real estate		582,851			11,568			4,447			598,866			536,536			9,182			14,806			560,524
Multifamily		361,309			-			-			361,309			309,666			-			-			309,666
Mixed use commercial		50,356			-			16			50,372			34,806			-			-			34,806
Real estate construction		31,628			-			-			31,628			26,206			-			-			26,206
Residential mortgages		180,564			-			2,264			182,828			183,263			-			4,565			187,828
Home equity		47,943			-			355			48,298			49,569			-			1,413			50,982
Consumer		6,279			-			165			6,444			7,279			-			323			7,602
Total	$	1,443,544		$	15,466		$	17,616		$	1,476,626		$	1,315,247		$	10,407		$	29,773		$	1,355,427
% of Total		97.8	%		1.0	%		1.2	%		100.0	%		97.0	%		0.8	%		2.2	%		100.0	%