LOANS

6 Months Ended

Jun. 30, 2013

LoansAbstract

LOANS

3. LOANS

Loans outstanding, by general ledger classification, as of June 30, 2013 and December 31, 2012, consisted of the following:

			% of					% of
	June 30,		Total			December 31,		Total
(In thousands)	2013		Loans			2012		Loans
Residential mortgage	$	532,356		42.52	%	$	515,014		45.47	%
Commercial mortgage		534,371		42.68			420,086		37.09
Commercial loans		106,598		8.51			115,372		10.19
Construction loans		9,179		0.73			9,328		0.83
Home equity lines of credit		47,583		3.80			49,635		4.38
Consumer loans, including fixed
rate home equity loans		19,552		1.56			21,188		1.87
Other loans		2,545		0.20			1,961		0.17
Total loans	$	1,252,184		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 June 30, 2013 and December 31, 2012:

			% of					% of
	June 30,		Total			December 31,		Total
(In thousands)	2013		Loans			2012		Loans
Primary residential mortgage	$	542,442		43.44	%	$	527,803		46.74	%
Home equity lines of credit		47,694		3.82			49,635		4.40
Junior lien loan on residence		13,712		1.10			11,893		1.05
Multifamily property		254,485		20.38			161,705		14.32
Owner-occupied commercial real estate		82,584		6.61			84,720		7.50
Investment commercial real estate		258,623		20.71			242,586		21.48
Commercial and industrial		26,331		2.11			25,820		2.29
Secured by farmland		203		0.02			207		0.02
Agricultural production loans		12		N/A			14		N/A
Commercial construction loans		9,188		0.74			9,323		0.83
Consumer and other loans		13,362		1.07			15,480		1.37
Total loans	$	1,248,636		100.00	%	$	1,129,186		100.00	%
Net deferred fees		3,548					3,398
Total loans including net deferred costs	$	1,252,184				$	1,132,584

Included in the totals above for June 30, 2013 are $541 thousand of unamortized discount 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 June 30, 2013 and December 31, 2012:

June 30, 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	$	4,365	$	131	$	538,077	$	2,931	$	542,442	$	3,062
Home equity lines
of credit		209		—		47,485		253		47,694		253
Junior lien loan
on residence		245		—		13,467		71		13,712		71
Multifamily
property		—		—		254,485		2,159		254,485		2,159
Owner-occupied
commercial
real estate		3,938		—		78,646		2,414		82,584		2,414
Investment
commercial
real estate		4,949		348		253,674		3,812		258,623		4,160
Commercial and
industrial		500		362		25,831		768		26,331		1,130
Secured by
farmland		—		—		203		3		203		3
Agricultural
production		—		—		12		—		12		—
Commercial
construction		3,771		—		5,417		112		9,188		112
Consumer and
other		—		—		13,362		74		13,362		74
Unallocated		—		—		—		—				—
Total ALLL	$	17,977	$	841	$	1,230,659	$	12,597	$	1,248,636	$	13,438

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 $8.1 million at June 30, 2013 and $11.7 million at December 31, 2012. Impaired loans also include performing residential, commercial mortgage and commercial troubled debt restructured loans of $6.1 million at June 30, 2013 and $6.4 million at December 31, 2012. The allowance allocated to troubled debt restructured loans which are nonaccrual was $266 thousand at June 30, 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 June 30, 2013. The Corporation has not committed to lend additional amounts as of June 30, 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 June 30, 2013 and December 31, 2012:

June 30, 2013
	Unpaid						Average		Interest
	Principal		Recorded		Specific		Impaired		Income
(In thousands)	Balance		Investment		Reserves		Loans		Recognized
With no related allowance recorded:
Primary residential mortgage	$	4,387	$	3,383	$	—	$	5,372	$	59
Multifamily property		—		—		—		—		—
Owner-occupied commercial real estate		4,167		3,938		—		4,478		54
Investment commercial real estate		—		—		—		218		3
Commercial and industrial		69		69		—		74		1
Commercial Construction		3,771		3,771		—		—		—
Home equity lines of credit		209		209		—		110		2
Junior lien loan on residence		389		245		—		400		6
Consumer and other		—		—		—		—		—
Total loans with no related allowance	$	12,992	$	11,615	$	—	$	10,652	$	125
With related allowance recorded:
Primary residential mortgage	$	1,047	$	982	$	131	$	1,435	$	38
Owner-occupied commercial real estate		—		—		—		—		—
Investment commercial real estate		4,949		4,949		348		4,949		619
Commercial and industrial		435		431		362		212		3
Junior lien loan on residence		—		—		—		—		—
Total loans with related allowance	$	6,431	$	6,362	$	841	$	6,596	$	660
Total loans individually evaluated for
impairment	$	19,423	$	17,977	$	841	$	17,248	$	785

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 June 30, 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 June 30, 2013 and December 31, 2012:

	June 30, 2013
			Loans Past Due
			Over 90 Days
			And Still
			Accruing
(In thousands)	Nonaccrual		Interest
Primary residential mortgage	$	3,318	$	—
Home equity lines of credit		209		—
Junior lien loan on residence		245		—
Owner-occupied commercial real estate		3,938		—
Commercial and industrial		365		—
Total	$	8,075	$	—

	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 June 30, 2013 and December 31, 2012 by class of loans, excluding nonaccrual loans:

June 30, 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	$	1,085	$	301	$	—	$	1,386
Home equity lines of credit		14		—		—		14
Owner-occupied commercial real estate		—		144		—		144
Total	$	1,099	$	445	$	—	$	1,544

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.

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 June 30, 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	$	536,351	$	1,407	$	4,684	$	—
Home equity lines of credit		47,485		—		209		—
Junior lien loan on residence		13,436		—		276		—
Multifamily property		254,485		—		—		—
Farmland		203		—		—		—
Owner-occupied commercial real estate		72,027		87		10,470		—
Investment commercial real estate		236,190		10,241		12,192		—
Agricultural production loans		12		—		—		—
Commercial and industrial		25,786		24		521		—
Commercial construction		3,863		1,554		3,771		—
Consumer and other loans		12,496		866		—		—
Total	$	1,202,334	$	14,179	$	32,123	$	—

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 June 30, 2013, $18.0 million of the $32.1 million of the substandard loans were also considered impaired 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 June 30, 2013 is summarized below:

	April 1,										June 30,
	2013										2013
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	3,340	$	(393	)	$	1	$	114		$	3,062
Home equity lines of credit		260		—			—		(7	)		253
Junior lien loan on residence		63		—			—		8			71
Multifamily property		1,562		—			—		597			2,159
Owner-occupied commercial real estate		2,428		—			19		(33	)		2,414
Investment commercial real estate		4,272		—			6		(118	)		4,160
Agricultural production loans		—		—			—		—			—
Commercial and industrial		1,147		—			27		(44	)		1,130
Secured by farmland		3		—			—		—			3
Commercial construction		114		—			—		(2	)		112
Consumer and other loans		90		(2	)		1		(15	)		74
Total ALLL	$	13,279	$	(395	)	$	54	$	500		$	13,438

The activity in the allowance for loan losses for the six months ended June 30, 2013 is summarized below:

	January 1,										June 30,
	2013										2013
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	3,047	$	(456	)	$	13	$	458		$	3,062
Home equity lines of credit		267		—			—		(14	)		253
Junior lien loan on residence		314		(295	)		7		45			71
Multifamily property		1,305		—			11		843			2,159
Owner-occupied commercial real estate		2,509		—			38		(133	)		2,414
Investment commercial real estate		4,155		—			12		(7	)		4,160
Agricultural production loans		—		—			—		—			—
Commercial and industrial		803		(15	)		37		305			1,130
Secured by farmland		3		—			—		—			3
Commercial construction		240		—			1		(129	)		112
Consumer and other loans		92		(4	)		4		(18	)		74
Total ALLL	$	12,735	$	(770	)	$	123	$	1,350		$	13,438

The activity in the allowance for loan losses for the three months ended June 30, 2012 is summarized below:

	April 1,										June 30,
	2012										2012
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	2,414	$	(988	)	$	1	$	1,175		$	2,602
Home equity lines of credit		204		(91	)		—		95			208
Junior lien loan on residence		64		(57	)		4		44			55
Multifamily property		705		(375	)		—		509			839
Farmland		—		—			—		3			3
Owner-occupied commercial real estate		3,108		(916	)		126		1,100			3,418
Investment commercial real estate		4,181		(56	)		9		650			4,784
Agricultural production loans		1		—			—		—			1
Commercial and industrial		1,291		(112	)		4		(266	)		917
Commercial construction		669		(72	)		—		(363	)		234
Consumer and other loans		78		(20	)		6		13			77
Unallocated		508		—			—		40			548
Total ALLL	$	13,223	$	(2,687	)	$	150	$	3,000		$	13,686

The activity in the allowance for loan losses for the six months ended June 30, 2012 is summarized below:

	January 1,										June 30,
	2012										2012
	Beginning										Ending
(In thousands)	ALLL		Charge-Offs			Recoveries		Provision			ALLL
Primary residential mortgage	$	2,414	$	(988	)	$	1	$	1,175		$	2,602
Home equity lines of credit		204		(91	)		—		95			208
Junior lien loan on residence		64		(57	)		4		44			55
Multifamily property		705		(375	)		—		509			839
Farmland		—		—			—		3			3
Owner-occupied commercial real estate		3,108		(916	)		126		1,100			3,418
Investment commercial real estate		4,181		(56	)		9		650			4,784
Agricultural production loans		1		—			—		—			1
Commercial and industrial		1,291		(112	)		4		(266	)		917
Commercial construction		669		(72	)		—		(363	)		234
Consumer and other loans		78		(20	)		6		13			77
Unallocated		508		—			—		40			548
Total ALLL	$	13,223	$	(2,687	)	$	150	$	3,000		$	13,686

Troubled Debt Restructurings:

The Corporation has allocated $502 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 June 30, 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 six month period ending June 30, 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 June 30, 2013:

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		1	$	160	$	160
Total		1	$	160	$	160

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2013:

			Pre-		Post-
			Modification		Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment
Primary residential mortgage		3	$	482	$	482
Total		3	$	482	$	482

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 June 30, 2012:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Primary Residential Mortgage		2	$	260	$	260
Total		2	$	260	$	260

The following table presents loans by class modified as troubled debt restructurings that occurred during the six month period ending June 30, 2012:

			Pre-Modification		Post-Modification
			Outstanding		Outstanding
	Number of		Recorded		Recorded
	Contracts		Investment		Investment
Primary Residential Mortgage		4	$	610	$	610
Junior Lien on Residence		1		249		249
Owner-Occupied Commercial Real Estate		1		2,197		2,197
Total		6	$	3,056	$	3,056

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 six month period ended June 30, 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 for which there was a payment default, within twelve months of modification, during the six-month period ended June 30, 2012:

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

The defaults that occurred during the three and six months ended June 30, 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.