LOANS

3 Months Ended

Mar. 31, 2013

LoansAbstract

LOANS

3. LOANS

Loans outstanding, by general ledger classification, as of March 31, 2013 and December 31, 2012, consisted of the following:

			% of					% of
	March 31,		Total			December 31,		Total
(In thousands)	2013		Loans			2012		Loans
Residential mortgage	$	523,051		45.02	%	$	515,014		45.47	%
Commercial mortgage		455,670		39.22			420,086		37.09
Commercial loans		105,305		9.06			115,372		10.19
Construction loans		9,180		0.79			9,328		0.83
Home equity lines of credit		46,778		4.03			49,635		4.38
Consumer loans, including fixed
rate home equity loans		20,782		1.79			21,188		1.87
Other loans		997		0.09			1,961		0.17
Total loans	$	1,161,763		100.00	%	$	1,132,584		100.00	%

In determining an appropriate amount for the allowance, the Bank segments and evaluates the loan portfolio based on federal call report codes. The following portfolio classes have been identified as of March 31, 2013 and December 31, 2012:

			% of					% of
	March 31,		Total			December 31,		Total
(In thousands)	2013		Loans			2012		Loans
Primary residential mortgage	$	535,339		46.22	%	$	527,803		46.74	%
Home equity lines of credit		46,773		4.04			49,635		4.40
Junior lien loan on residence		11,761		1.02			11,893		1.05
Multifamily property		180,611		15.59			161,705		14.32
Owner-occupied commercial real estate		85,299		7.36			84,720		7.50
Investment commercial real estate		246,631		21.29			242,586		21.48
Commercial and industrial		28,442		2.46			25,820		2.29
Secured by farmland		205		0.02			207		0.02
Agricultural production loans		13		N/A			14		N/A
Commercial construction loans		9,187		0.79			9,323		0.83
Consumer and other loans		14,051		1.21			15,480		1.37
Total loans	$	1,158,312		100.00	%	$	1,129,186		100.00	%
Net deferred fees		3,451					3,398
Total loans including net deferred costs	$	1,161,763				$	1,132,584

Included in the totals above for March 31, 2013 are $481 thousand of unamortized discount as compared to $543 thousand of unamortized discount for December 31, 2012.

The following tables present the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance for loan losses as of March 31, 2013 and December 31, 2012:

March 31, 2013
	Total		Ending ALLL		Total		Ending ALLL
	Loans		Attributable		Loans		Attributable
	Individually		to Loans		Collectively		to Loans
	Evaluated		Individually		Evaluated		Collectively				Total
	for		Evaluated for		for		Evaluated for		Total		Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		ALLL
Primary residential
mortgage	$	6,656	$	337	$	528,683	$	3,003	$	535,339	$	3,340
Home equity lines
of credit		110		—		46,663		260		46,773		260
Junior lien loan
on residence		250		—		11,511		63		11,761		63
Multifamily
property		—		—		180,611		1,562		180,611		1,562
Owner-occupied
commercial
real estate		4,678		—		80,621		2,428		85,299		2,428
Investment
commercial
real estate		5,168		341		241,463		3,931		246,631		4,272
Commercial and
industrial		414		306		28,028		841		28,442		1,147
Secured by
farmland		—		—		205		3		205		3
Agricultural
production		—		—		13		—		13		—
Commercial
construction		3,770		—		5,417		114		9,187		114
Consumer and
other		—		—		14,051		90		14,051		90
Unallocated		—		—		—		—		—		—
Total ALLL	$	21,046	$	984	$	1,137,266	$	12,295	$	1,158,312	$	13,279

December 31, 2012
			Ending				Ending
			ALLL				ALLL
	Total		Attributable		Total		Attributable
	Loans		To Loans		Loans		To Loans				Total
	Individually		Individually		Collectively		Collectively				Ending		Allocation
	Evaluated		Evaluated		Evaluated		Evaluated				ALLL		Of Previous			Total
	For		For		For		For		Total		Before		Unallocated			Ending
(In thousands)	Impairment		Impairment		Impairment		Impairment		Loans		Allocation		ALLL			ALLL
Primary residential
mortgage	$	7,155	$	148	$	520,648	$	2,789	$	527,803	$	2,937	$	110		$	3,047
Home equity
lines of credit		110		—		49,525		257		49,635		257		10			267
Junior lien loan
on residence		562		240		11,331		71		11,893		311		3			314
Multifamily
property		—		—		161,705		1,255		161,705		1,255		50			1,305
Owner-occupied
commercial
real estate		4,724		—		79,996		2,413		84,720		2,413		96			2,509
Investment
commercial
real estate		5,173		384		237,413		3,627		242,586		4,011		144			4,155
Commercial and
industrial		423		41		25,397		733		25,820		774		29			803
Secured by
farmland		—		—		207		3		207		3		—			3
Agricultural
production		—		—		14		—		14		—		—			—
Commercial
construction		—		—		9,323		231		9,323		231		9			240
Consumer and
other		—		—		15,480		89		15,480		89		3			92
Unallocated		—		—		—		454		—		454		(454	)		—
Total ALLL	$	18,147	$	813	$	1,111,039	$	11,922	$	1,129,186	$	12,735	$	—		$	12,735

Impaired loans include nonaccrual loans of $11.3 million at March 31, 2013 and $11.7 million at December 31, 2012. Impaired loans also include performing residential, commercial mortgage and commercial troubled debt restructured loans of $6.0 million at March 31, 2013 and $6.4 million at December 31, 2012. The allowance allocated to troubled debt restructured loans which are nonaccrual was $270 thousand at March 31, 2013 and the allowance allocated to troubled debt restructured loans which are nonaccrual was $240 thousand at December 31, 2012. All accruing troubled debt restructured loans were paying in accordance with restructured terms as of March 31, 2013. The Corporation has not committed to lend additional amounts as of March 31, 2013 to customers with outstanding loans that are classified as loan restructurings.

The following tables present loans individually evaluated for impairment by class of loans as of March 31, 2013 and December 31, 2012:

March 31, 2013
	Unpaid						Average		Interest
	Principal		Recorded		Specific		Impaired		Income
(In thousands)	Balance		Investment		Reserves		Loans		Recognized
With no related allowance recorded:
Primary residential mortgage	$	4,738	$	3,586	$	—	$	4,440	$	45
Multifamily property		—		—		—		—		—
Owner-occupied commercial real estate		4,957		4,678		—		4,307		51
Investment commercial real estate		332		—		—		—		—
Commercial and industrial		175		72		—		75		1
Commercial Construction		3,770		3,770		—		—		—
Home equity lines of credit		110		110		—		110		2
Junior lien loan on residence		741		250		—		555		9
Consumer and other		—		—		—		—		—
Total loans with no related allowance	$	14,823	$	12,466	$	—	$	9,487	$	108
With related allowance recorded:
Primary residential mortgage	$	3,574	$	3,070	$	337	$	2,554	$	54
Owner-occupied commercial real estate		—		—		—		—		—
Investment commercial real estate		5,181		5,168		341		5,171		622
Commercial and industrial		342		342		306		81		2
Junior lien loan on residence		—		—		—		—		—
Total loans with related allowance	$	9,097	$	8,580	$	984	$	7,806	$	678
Total loans individually evaluated for
impairment	$	23,920	$	21,046	$	984	$	17,293	$	786

December 31, 2012
	Unpaid						Average		Interest
	Principal		Recorded		Specific		Impaired		Income
(In thousands)	Balance		Investment		Reserves		Loans		Recognized
With no related allowance recorded:
Primary residential mortgage	$	8,605	$	6,148	$	—	$	8,110	$	384
Multifamily property		—		—		—		185		16
Owner-occupied commercial real estate		4,971		4,723		—		9,575		570
Investment commercial real estate		336		—		—		796		51
Commercial and industrial		432		345		—		640		47
Home equity lines of credit		110		110		—		221		11
Junior lien loan on residence		429		236		—		439		30
Total loans with no related allowance	$	14,883	$	11,562	$	—	$	19,966	$	1,109
With related allowance recorded:
Primary residential mortgage	$	1,056	$	1,007	$	148	$	851	$	38
Multifamily property		—		—		—		—		—
Owner-occupied commercial real estate		—		—		—		—		—
Investment commercial real estate		5,183		5,173		384		5,013		251
Commercial and industrial		78		78		41		92		74
Junior lien loan on residence		327		327		240		—		8
Commercial construction		—		—		—		194		—
Total loans with related allowance	$	6,644	$	6,585	$	813	$	6,150	$	371
Total loans individually evaluated for
Impairment	$	21,527	$	18,147	$	813	$	26,116	$	1,480

The Corporation did not recognize any income on nonaccruing impaired loans for the three months ended March 31, 2013 and 2012.

The following tables present the recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of March 31, 2013 and December 31, 2012:

	March 31, 2013
			Loans Past Due
			Over 90 Days
			And Still
			Accruing
(In thousands)	Nonaccrual		Interest
Primary residential mortgage	$	5,764	$	—
Home equity lines of credit		110		—
Junior lien loan on residence		250		—
Owner-occupied commercial real estate		4,678		—
Investment commercial real estate		218		—
Commercial and industrial		270		—
Total	$	11,290	$	—

	December 31, 2012
			Loans Past Due
			Over 90 Days
			And Still
			Accruing
(In thousands)	Nonaccrual		Interest
Primary residential mortgage	$	6,519	$	—
Home equity lines of credit		110		—
Junior lien loan on residence		562		—
Owner-occupied commercial real estate		4,317		—
Investment commercial real estate		224		—
Total	$	11,732	$	—

The following tables present the aging of the recorded investment in past due loans as of March 31, 2013 and December 31, 2012 by class of loans, excluding nonaccrual loans:

March 31, 2013
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	1,675	$	—	$	—	$	1,675
Junior lien loan on residence		—		—		—		—
Owner-occupied commercial real estate		—		—		—		—
Commercial and industrial		116		—		—		116
Consumer and other		—		—		—		—
Total	$	1,791	$	—	$	—	$	1,791

December 31, 2012
	30-59		60-89		Greater Than
	Days		Days		90 Days		Total
(In thousands)	Past Due		Past Due		Past Due		Past Due
Primary residential mortgage	$	2,513	$	203	$	—	$	2,716
Home equity lines of credit		25		—		—		25
Junior lien loan on residence		31		—		—		31
Owner-occupied commercial real estate		407		—		—		407
Investment commercial real estate		592		—		—		592
Commercial and industrial		15		—		—		15
Total	$	3,583	$	203	$	—	$	3,786

Credit Quality Indicators:

The Corporation categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Corporation analyzes loans individually by classifying the loans as to credit risk. The risk rating analysis of loans is performed (i) when the loan is initially underwritten, (ii) annually for loans in excess of $500,000, (iii) on a random quarterly basis from either internal reviews with the Senior Credit Officer or externally through an independent loan review firm, or (iv) whenever Management otherwise identifies a potentially negative trend or issue relating to a borrower. In addition, for all loan types, the Corporation evaluates credit quality based on the aging status of the loan, which was previously presented.

The Corporation uses the following definitions for risk ratings:

Special Mention: Loans subject to special mention have a potential weakness that deserves Management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loans or of the institution’s credit position at some future date.

Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful: Loans classified as doubtful have all the weakness inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

The Corporation considers the performance of the loan portfolio and its impact on the allowance for loan losses.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be pass-rated loans. As of March 31, 2013, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	525,219	$	3,141	$	6,979	$	—
Home equity lines of credit		46,663		—		110		—
Junior lien loan on residence		11,477		34		250		—
Multifamily property		180,611		—		—		—
Farmland		205		—		—		—
Owner-occupied commercial real estate		74,390		420		10,489		—
Investment commercial real estate		219,439		13,310		13,882		—
Agricultural production loans		13		—		—		—
Commercial and industrial		27,951		26		465		—
Commercial construction		3,863		1,554		3,770		—
Consumer and other loans		14,051		—		—		—
Total	$	1,103,882	$	18,485	$	35,945	$	—

As of December 31, 2012, and based on the most recent analysis performed, the risk category of loans by class of loans is as follows:

			Special
(In thousands)	Pass		Mention		Substandard		Doubtful
Primary residential mortgage	$	517,336	$	3,152	$	7,315	$	—
Home equity lines of credit		49,525		—		110		—
Junior lien loan on residence		11,294		37		562		—
Multifamily property		161,229		476		—		—
Owner-occupied commercial real estate		73,809		334		10,577		—
Investment commercial real estate		216,394		13,237		12,955		—
Agricultural production loans		14		—		—		—
Commercial and industrial		25,191		134		495		—
Secured by farmland		207		—		—		—
Commercial construction		3,999		5,324		—		—
Consumer and other loans		15,480		—		—		—
Total	$	1,074,478	$	22,694	$	32,014	$	—

At March 31, 2013, $21.0 million of the $35.9 million of the substandard loans were also considered impaired as compared to December 31, 2012, when $18.1 million of the $32.0 million of the substandard loans were also impaired.

The activity in the allowance for loan losses for the three months ended March 31, 2013 is summarized below:

	January 1,										March 31,
	2013										2013
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	3,047	$	(63	)	$	12	$	344		$	3,340
Home equity lines of credit		267		—			—		(7	)		260
Junior lien loan on residence		314		(295	)		7		37			63
Multifamily property		1,305		—			11		246			1,562
Owner-occupied commercial real estate		2,509		—			19		(100	)		2,428
Investment commercial real estate		4,155		—			6		111			4,272
Agricultural production loans		—		—			—		—			—
Commercial and industrial		803		(15	)		10		349			1,147
Secured by farmland		3		—			—		—			3
Commercial construction		240		—			1		(127	)		114
Consumer and other loans		92		(2	)		3		(3	)		90
Total ALLL	$	12,735	$	(375	)	$	69	$	850		$	13,279

The activity in the allowance for loan losses for the three months ended March 31, 2012 is summarized below:

	January 1,										March 31,
	2012										2012
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	2,414	$	(561	)	$	—	$	680		$	2,533
Home equity lines of credit		204		(91	)		—		90			203
Junior lien loan on residence		64		(56	)		—		51			59
Multifamily property		705		(354	)		—		438			789
Farmland		—		—			—		3			3
Owner-occupied commercial real estate		3,108		(112	)		113		435			3,544
Investment commercial real estate		4,181		(56	)		—		216			4,341
Agricultural production loans		1		—			—		—			1
Commercial and industrial		1,291		(45	)		2		(204	)		1,044
Commercial construction		669		(53	)		—		(256	)		360
Consumer and other loans		78		(17	)		3		10			74
Unallocated		508		—			—		37			545
Total ALLL	$	13,223	$	(1,345	)	$	118	$	1,500		$	13,496

Troubled Debt Restructurings:

The Corporation has allocated $434 thousand and $483 thousand of specific reserves, on accruing TDR’s, to customers whose loan terms have been modified in troubled debt restructurings as of March 31, 2013 and December 31, 2012, respectively. There were no unfunded commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

During the three month period ending March 31, 2013 and 2012, the terms of certain loans were modified as troubled debt restructurings. The modification of the terms of such loans included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at a stated rate of interest lower than the current market rate for new debt with similar risk; or a permanent reduction of the recorded investment in the loan.

The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2013:

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		2	$	322	$	322
Total		2	$	322	$	322

The identification of the troubled debt restructured loans did not have a significant impact on the allowance for loan losses. The following table presents loans by class modified as troubled debt restructurings that occurred during the three month period ending March 31, 2012:

			Pre- Modification		Post- Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Primary Residential Mortgage		2	$	350	$	350
Junior Lien on Residence		1		258		258
Owner-Occupied Commercial
Real Estate		1		2,241		2,241
Total		4	$	2,849	$	2,849

The following table presents loans by class modified as troubled debt restructurings for which there was a payment default, within twelve months of modification, during the three month period ended March 31, 2013:

	Number of		Recorded
(Dollars in thousands	Contracts		Investment
Owner-occupied commercial real estate		1		406
Commercial and industrial		1	$	270
Total		2	$	676

The following table presents loans by class modified as troubled debt restructurings from April 1, 2011 through March 31, 2012 for which there was a payment default during the same period:

	Number of		Recorded
	Contracts		Investment
Owner-Occupied Commercial Real Estate		1	$	412
Total		1	$	412

The defaults that occurred during the three months ended March 31, 2013 and 2012 did not have a significant impact on the allowance for loan losses.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Corporation’s internal underwriting policy. At the time a loan is restructured, the Bank performs a full re-underwriting analysis, which includes, at a minimum, obtaining current financial statements and tax returns, copies of all leases, and an updated independent appraisal of the property. A loan will continue to accrue interest if it can be reasonably determined that the borrower should be able to perform under the modified terms, that the loan has not been chronically delinquent (both to debt service and real estate taxes) or in nonaccrual status since its inception, and that there have been no charge-offs on the loan. Restructured loans with previous charge-offs would not accrue interest at the time of the troubled debt restructuring. At a minimum, six months of contractual payments would need to be made on a restructured loan before returning a loan to accrual status. Once a loan is classified as a TDR, the loan is reported as a TDR until the loan is paid in full, sold or charged-off. In rare circumstances, a loan may be removed from TDR status, if it meets the requirements of ASC 310-40-50-2.