4. LOANS

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

	March 31,			December 31,
	2013			2012
Commercial and industrial	$	187,775		$	168,709
Commercial real estate		399,270			369,271
Real estate construction		14,075			15,469
Residential mortgages (1st and 2nd liens)		146,967			146,575
Home equity		63,463			66,468
Consumer		12,849			14,288
Gross loans		824,399			780,780
Allowance for loan losses		(17,834	)		(17,781	)
Net loans at end of period	$	806,565		$	762,999

For the three months ended March 31, 2013 and 2012, the activity in the allowance for loan losses disaggregated by class is shown below (in thousands).

	Commercial and industrial			Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer			Unallocated			Total

Three months ended March 31, 2013
Balance at beginning of period	$	6,181		$	6,149	$	141	$	1,576	$	907	$	189		$	2,638		$	17,781
Charge-offs		(348	)		-		-		-		-		(11	)		-			(359	)
Recoveries		299			72		-		1		1		39			-			412
Provision for loan losses		(787	)		349		704		864		16		28			(1,174	)		-
Balance at end of period	$	5,345		$	6,570	$	845	$	2,441	$	924	$	245		$	1,464		$	17,834

	Commercial and industrial			Commercial real estate			Real estate construction			Residential mortgages (1st and 2nd liens)			Home equity			Consumer			Unallocated		Total

Three months ended March 31, 2012
Balance at beginning of period	$	25,047		$	11,029		$	623		$	2,401		$	512		$	313		$	33	$	39,958
Charge-offs		(337	)		-			-			(395	)		(61	)		(32	)		-		(825	)
Recoveries		855			-			-			1			-			19			-		875
Provision for loan losses		(1,772	)		(2,150	)		(44	)		28			804			54			3,080		-
Balance at end of period	$	23,793		$	8,879		$	579		$	2,035		$	1,255		$	354		$	3,113	$	40,008

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 uncollectibility 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 will be 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 is 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, real estate construction, residential mortgages (1st and 2nd liens), home equity and consumer. For performing loans, an estimate of adequacy 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.

The Company recorded no consolidated provision for loan losses for the three months ended March 31, 2013 and 2012. For the three months ended March 31, 2013, the Company decreased its allowance for loan losses allocated to comercial and industrial ("C&I") loans by $787 thousand, while increasing its allowance allocation to commercial real estate ("CRE"), real estate construction and residential mortgages (1st and 2nd liens) by $349 thousand, $704 thousand and $864 thousand, respectively.

The decrease in the allowance for loan losses allocated to C&I loans during the first quarter of 2013 reflected a 0.94% reduction in the ASC 450-20 historical loss factors rate on unimpaired pass rated C&I loans. Partially offsetting the loss factors rate reduction was a $20 million increase in the balance of unimpaired pass rated C&I loans during the first quarter of 2013, coupled with an increase of $97 thousand in specific reserves for C&I loans as computed uder ASC 310-10 at March 31, 2013 as compared to December 31, 2012.

The increase in the allowance for loan losses allocated to CRE loans was primarily due to a $39 million increase in the balance of unimpaired pass rated CRE loans, mainly due to growth in multi-family lending, versus December 31, 2012. The increases to the allowance allocated to real estate construction and residential mortgages was largely due to increases in the ASC 450-20 historical loss factors for such loans of 5.68% and 0.56%, respectively, when compared to December 31, 2012.

The changes in the ASC 450-20 loss factors rates were primarily due to 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 results from the Company's effort to improve the granularity of its individual loan segment charge-off history effective with the March 31, 2013 calculation. 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 at March 31, 2013 by individual loan segment.

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

March 31, 2013	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer		Unallocated		Total
Allowance for loan losses:
Ending balance: individually evaluated for impairment	$	437	$	-	$	-	$	618	$	165	$	56	$	-	$	1,276
Ending balance: collectively evaluated for impairment		4,908		6,570		845		1,823		759		189		1,464		16,558
Ending balance	$	5,345	$	6,570	$	845	$	2,441	$	924	$	245	$	1,464	$	17,834
Loan balances:
Ending balance: individually evaluated for impairment	$	10,545	$	8,238	$	840	$	4,976	$	750	$	324	$	-	$	25,673
Ending balance: collectively evaluated for impairment		177,230		391,032		13,235		141,991		62,713		12,525		-		798,726
Ending balance	$	187,775	$	399,270	$	14,075	$	146,967	$	63,463	$	12,849	$	-	$	824,399

December 31, 2012	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		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		6,127		140		1,001		821		189		2,638		16,757
Ending balance	$	6,181	$	6,149	$	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		359,828		13,508		141,915		65,966		14,267		-		753,824
Ending balance	$	168,709	$	369,271	$	15,469	$	146,575	$	66,468	$	14,288	$	-	$	780,780

The following table presents certain information pertaining to the Company's impaired loans disaggregated by class at March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013						December 31, 2012
	Impaired Loans						Impaired Loans
	Unpaid Principal Balance		Recorded Balance		Allowance Allocated		Unpaid Principal Balance		Recorded Balance		Allowance Allocated
With no allowance recorded:
Commercial and industrial	$	8,887	$	8,887	$	-	$	7,913	$	7,492	$	-
Commercial real estate		9,223		8,238		-		8,859		7,282		-
Real estate construction		840		840		-		1,334		1,305		-
Residential mortgages (1st and 2nd liens)		2,335		2,206		-		1,918		1,788		-
Home equity		572		572		-		418		416		-
Consumer		166		166		-		21		21		-
Subtotal		22,023		20,909		-		20,463		18,304		-

With an allowance recorded:
Commercial and industrial		1,960		1,658		437		2,884		2,877		340
Commercial real estate		-		-		-		2,161		2,161		22
Real estate construction		-		-		-		656		656		1
Residential mortgages (1st and 2nd liens)		2,896		2,770		618		3,015		2,872		575
Home equity		178		178		165		86		86		86
Consumer		158		158		56		-		-		-
Subtotal		5,192		4,764		1,276		8,802		8,652		1,024
Total	$	27,215	$	25,673	$	1,276	$	29,265	$	26,956	$	1,024

The following table presents additional information pertaining to the Company's impaired loans disaggregated by class for the three months ended March 31, 2013 and 2012 (in thousands):

	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
	Impaired Loans						Impaired Loans
	Average recorded investment in impaired loans		Interest income recognized on impaired loans		Interest income recognized on a cash basis on impaired loans		Average recorded investment in impaired loans		Interest income recognized on impaired loans		Interest income recognized on a cash basis on impaired loans
Commercial and industrial	$	10,947	$	57	$	-	$	29,678	$	265	$	-
Commercial real estate		11,090		69		-		73,791		325		-
Real estate construction		1,401		-		-		12,609		181		-
Residential mortgages (1st and 2nd liens)		5,004		42		-		8,463		-		-
Home equity		751		3		-		3,993		-		-
Consumer		318		5		-		675		-		-
Total	$	29,511	$	176	$	-	$	129,209	$	771	$	-

TDRs involve 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 $1 million and $800 thousand of specific reserves to customers whose loan terms have been modified in TDRs as of March 31, 2013 and December 31, 2012, respectively. These loans involved the restructuring of terms to allow customers to mitigate the risk of foreclosure 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 $38 thousand and $35 thousand were committed to be advanced in connection with TDRs as of March 31, 2013 and December 31, 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. 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.

The following tables present certain information regarding outstanding TDRs at March 31, 2013 and December 31, 2012 (dollars in thousands), TDRs executed during the three months ended March 31, 2013 and 2012 (dollars in thousands) and TDRs with payment defaults of 90 days or more within twelve months of restructuring during the three months ended March 31, 2013 and 2012 (dollars in thousands):

	March 31, 2013				December 31, 2012
Total Troubled Debt Restructurings	Number of Loans		Outstanding Recorded Balance		Number of Loans		Outstanding Recorded Balance

Commercial and industrial		42	$	6,400		41	$	6,468
Commercial real estate		8		5,072		9		6,238
Residential mortgages (1st and 2nd liens)		18		4,441		15		3,587
Consumer		5		324		5		311
		73	$	16,237		70	$	16,604

	Three months ended						Three months ended
	March 31, 2013						March 31, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
New Troubled Debt	of		Recorded		Recorded		of		Recorded		Recorded
Restructurings	Loans		Balance		Balance		Loans		Balance		Balance

Commercial and industrial		2	$	320	$	320		9	$	3,316	$	3,316
Residential mortgages (1st and 2nd liens)		3		905		905		-		-		-
Consumer		1		17		17		-		-		-
		6	$	1,242	$	1,242		9	$	3,316	$	3,316

	Three months ended				Three months ended
	March 31, 2013				March 31, 2012
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Defaulted Troubled Debt Restructurings	of Loans		Balance		of Loans		Balance

Commercial and industrial		-	$	-		1	$	15
Residential mortgages (1st and 2nd liens)		-		-		1		494
		-	$	-		2	$	509

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 information regarding modifications and renewals executed during the three months ended March 31, 2013 and 2012 that are not considered TDRs (dollars in thousands):

	Three months ended				Three months ended
	March 31, 2013				March 31, 2012
			Outstanding				Outstanding
	Number		Recorded		Number		Recorded
Modifications Not Considered TDRs	of Loans		Balance		of Loans		Balance

Commercial and industrial		-	$	-		1	$	580
Commercial real estate		11		19,703		2		3,179
		11	$	19,703		3	$	3,759

The following is a summary of information pertaining to non-performing assets at March 31, 2013 and December 31, 2012 (in thousands):

	March 31,		December 31,
	2013		2012
Non-accrual loans	$	14,420	$	16,435
Non-accrual loans held-for-sale		-		907
Loans 90 days past due and still accruing		-		-
OREO		372		1,572
Total non-performing assets	$	14,792	$	18,914
TDRs accruing interest	$	10,247	$	9,954
TDRs nonaccruing	$	5,990	$	6,650

The following table summarizes non-accrual loans by loan class at March 31, 2013 and December 31, 2012 (dollars in thousands):

	Non-accrual Loans
						Total		% of								Total		% of
			% of			Loans		Total					% of			Loans		Total
	3/31/2013		Total			3/31/2013		Loans			12/31/2012		Total			12/31/2012		Loans
Commercial and industrial	$	6,746		46.8	%	$	187,775		0.8	%	$	6,529		39.8	%	$	168,709		0.8	%
Commercial real estate		3,972		27.5			399,270		0.5			5,192		31.6			369,271		0.7
Real estate construction		840		5.8			14,075		0.1			1,961		11.9			15,469		0.3
Residential mortgages (1st and 2nd liens)		2,336		16.2			146,967		0.3			2,466		15.0			146,575		0.3
Home equity		514		3.6			63,463		-			266		1.6			66,468		-
Consumer		12		0.1			12,849		-			21		0.1			14,288		-
Total non-accrual loans	$	14,420		100.0	%	$	824,399		1.7	%	$	16,435		100.0	%	$	780,780		2.1	%

For the non-accrual loans outstanding at the end of the reported periods, additional interest income of approximately $406 thousand and $1.4 million would have been recorded on non-accrual loans during the three months ended March 31, 2013 and 2012, respectively, if the loans had performed in accordance with their original terms.

The following table details the collateral value securing non-accrual loans at March 31, 2013 and December 31, 2012 (in thousands):

	March 31, 2013				December 31, 2012
	Non-accrual Loans				Non-accrual Loans
	Principal Balance		Collateral Value		Principal Balance		Collateral Value
Commercial and industrial (1)	$	6,746	$	5,163	$	6,529	$	4,400
Commercial real estate		3,972		10,490		5,192		12,675
Real estate construction		840		3,310		1,961		3,661
Residential mortgages (1st and 2nd liens)		2,336		3,511		2,466		5,141
Home equity		514		1,436		266		849
Consumer		12		-		21		-
Total	$	14,420	$	23,910	$	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.

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

	Past Due
March 31, 2013	30 - 59 days		60 - 89 days		90 days and over		Total		Current		Total
Commercial and industrial	$	382	$	370	$	6,746	$	7,498	$	180,277	$	187,775
Commercial real estate		1,339		-		3,972		5,311		393,959		399,270
Real estate construction		-		-		840		840		13,235		14,075
Residential mortgages
(1st and 2nd liens)		2,540		-		2,336		4,876		142,091		146,967
Home equity		1,356		496		514		2,366		61,097		63,463
Consumer		79		1		12		92		12,757		12,849
Total	$	5,696	$	867	$	14,420	$	20,983	$	803,416	$	824,399

	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		362,605		369,271
Real estate construction		1,382		-		1,961		3,343		12,126		15,469
Residential mortgages
(1st and 2nd liens)		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

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.

At March 31, 2013 and December 31, 2012, based upon the most recent analysis performed, the following table presents the Company's loan portfolio credit risk profile by internally assigned grade disaggregated by class of loan (in thousands):

	Credit Risk Profile By Internally Assigned Grade
March 31, 2013	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer		Total
Grade:
Pass	$	163,819	$	353,080	$	5,283	$	141,991	$	62,949	$	12,530	$	739,652
Special mention		4,969		25,627		-		-		-		-		30,596
Substandard		18,987		20,563		8,792		4,976		514		319		54,151
Total	$	187,775	$	399,270	$	14,075	$	146,967	$	63,463	$	12,849	$	824,399

	Credit Risk Profile By Internally Assigned Grade
December 31, 2012	Commercial and industrial		Commercial real estate		Real estate construction		Residential mortgages (1st and 2nd liens)		Home equity		Consumer		Total
Grade:
Pass	$	143,804	$	311,123	$	4,790	$	141,915	$	65,966	$	14,267	$	681,865
Special mention		5,995		38,670		-		-		-		-		44,665
Substandard		18,910		19,478		10,679		4,660		502		21		54,250
Total	$	168,709	$	369,271	$	15,469	$	146,575	$	66,468	$	14,288	$	780,780

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.