NOTE 8 — LOANS RECEIVABLE

Loans receivable are summarized as follows:

	At
	March 31, 2013			December 31, 2012
	(in thousands)
Held for investment:
Residential
Residential mortgages	$	320,179		$	323,665

Commercial
Real estate-commercial		108,870			104,766
Real estate-residential		21,121			21,570
Real estate-multi-family		17,814			19,118
Construction loans		11,601			16,288
Commercial and industrial loans		5,202			4,646
Total commercial loans		164,608			166,388

Consumer
Home equity and second mortgage		39,357			40,143
Other consumer		1,755			1,835
Total consumer loans		41,112			41,978

Total loans		525,899			532,031
Net deferred loan origination costs and unamortized premiums		1,619			1,611
Less allowance for loan losses		(6,662	)		(6,922	)
Total loans receivable	$	520,856		$	526,720

Held for sale:
Residential
Residential mortgages	$	711		$	706

The following table presents the composition of the commercial loan portfolio by credit quality indicators:

	At March 31, 2013
	Pass		Special mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	95,567	$	4,161	$	9,142	$	—	$	108,870
Real estate-residential		20,027		373		721		—		21,121
Real estate-multi-family		14,456		—		3,358		—		17,814
Construction loans		3,401		3,551		4,649		—		11,601
Commercial and industrial loans		5,124		78		—		—		5,202
Total	$	138,575	$	8,163	$	17,870	$	—	$	164,608

	At December 31, 2012
	Pass		Special mention		Substandard		Doubtful		Total
	(in thousands)
Real estate-commercial	$	91,446	$	4,192	$	9,128	$	—	$	104,766
Real estate-residential		19,244		1,018		1,308		—		21,570
Real estate-multi-family		15,751		—		3,367		—		19,118
Construction loans		7,397		4,097		4,794		—		16,288
Commercial and industrial loans		4,565		81		-		—		4,646
Total	$	138,403	$	9,388	$	18,597	$	—	$	166,388

In order to assess and monitor the credit risk associated with commercial loans, the Company employs a risk rating methodology whereby each commercial loan is initially assigned a risk grade. At least annually, all risk ratings are reviewed in light of information received such as tax returns, rent rolls, cash flow statements, appraisals, and any other information which may affect the then current risk rating, which is adjusted upward or downward as needed. At the end of each quarter the risk ratings are summarized and become a component of the evaluation of the allowance for loan losses. The Company's risk rating definitions mirror those promulgated by banking regulators and are as follows:

Pass: A good quality loan is characterized by satisfactory liquidity; reasonable debt capacity and coverage; acceptable management in all critical positions and normal operating results for its peer group. The Company has grades 1 through 6 within the Pass category which reflect the increasing amount of attention paid to the individual loan because of, among other things, trends in debt service coverage, management weaknesses, or collateral values.

Special mention: A loan that has potential weaknesses that deserves management's close attention. Although the loan is currently protected, if left uncorrected, potential weaknesses may result in the deterioration of the loan's repayment prospects or in the borrower's future credit position. Potential weaknesses include: weakening financial condition; an unrealistic repayment program; inadequate sources of funds; lack of adequate collateral; credit information; or documentation. There is currently the capacity to meet interest and principal payments, but further adverse business, financial, or economic conditions may impair the borrower's capacity or willingness to pay interest and repay principal.

Substandard: A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged. Although no loss of principal or interest is presently apparent, there is the distinct possibility that a partial loss of interest and/or principal will be sustained if the deficiencies are not corrected. There is a current identifiable vulnerability to default

and the dependence upon favorable business, financial, or economic conditions to meet timely payment of interest and repayment of principal.

Doubtful: A loan which has all the weaknesses inherent in a substandard asset 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 possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to strengthen the asset, classification as an estimated loss is deferred until a more exact status is determined. Pending factors include: proposed merger, acquisition, liquidation, capital injection, perfecting liens on additional collateral, and refinancing plans.

Loss: Loans which are considered uncollectible and have been charged off. The Company has charged-off all loans classified as loss.

Loans classified as special mention, substandard or doubtful are monitored individually on a monthly basis. Loans which require impairment evaluation are placed on nonaccrual status and are classified as substandard or doubtful.

The following table presents the composition of the residential mortgage and consumer loan portfolios by credit quality indicators:

	At March 31, 2013
	Performing		Nonperforming		Total
	(in thousands)
Residential mortgages	$	317,937	$	2,242	$	320,179
Home equity and second mortgage		39,214		143		39,357
Other consumer		1,744		11		1,755
Total	$	358,895	$	2,396	$	361,291

	At December 31, 2012
	Performing		Nonperforming		Total
	(in thousands)
Residential mortgages	$	321,400	$	2,265	$	323,665
Home equity and second mortgage		40,000		143		40,143
Other consumer		1,827		8		1,835
Total	$	363,227	$	2,416	$	365,643

In order to assess and monitor the credit risk associated with residential mortgage loans and consumer loans which include second mortgage loans and home equity secured lines of credit, the Company relies upon the payment status of the loan. Residential mortgage and other consumer loans 90 days or more past due are placed on nonaccrual status, classified as nonperforming, and evaluated for impairment.

The following table presents by class nonperforming loans including impaired loans and loan balances 90 days or more past due for which the accrual of interest has been discontinued:

	At
	March 31, 2013		December 31, 2012
	(in thousands)
Residential
Residential mortgages	$	2,242	$	2,265
Commercial
Real estate-commercial		552		1,098
Real estate-residential		50		51
Construction loans		4,649		4,794
Commercial and industrial loans		—		—
Consumer
Home equity and second mortgage		143		143
Other consumer		11		8
Total nonperforming loans	$	7,647	$	8,359
Total loans past due 90 days as to interest or principal and accruing interest	$	—	$	—

The following tables present loans individually evaluated for impairment by class:

	At March 31, 2013
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	2,114	$	2,184	$	217	$	2,124	$	—
Commercial
Real estate-commercial		—		—		—		273		—
Construction loans		4,649		5,137		1,543		4,721		—
		6,763		7,321		1,760		7,118		—
With no allowance recorded:
Commercial
Real estate-commercial		552		552		—		552		—
Real estate-residential		50		50		—		75
		602		602		—		627		—
Total	$	7,365	$	7,923	$	1,760	$	7,745	$	—


	At December 31, 2012
	Recorded investment		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
	(in thousands)
With an allowance recorded:
Residential
Residential mortgages	$	2,137	$	2,214	$	218	$	2,061	$	—
Commercial
Real estate-commercial		546		1,497		296		697		—
Real estate-residential		51		51		4		298
Construction loans		4,737		5,137		1,029		3,604		—
Commercial and industrial loans		—		—		—		2		—
		7,471		8,899		1,547		6,662		—
With no allowance recorded:
Residential
Residential mortgages		—		—		—		698		—
Commercial
Real estate-commercial		552		552		—		1,012		—
Real estate-residential		—		—		—		216
Construction loans		57		116		—		1,932		—
		609		668		—		3,858		—
Total	$	8,080	$	9,567	$	1,547	$	10,520	$	—

The following tables present the contractual aging of delinquent loans by class:

	At March 31, 2013
	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Residential
Residential mortgages	$	317,044	$	963	$	—	$	2,172	$	3,135	$	320,179	$	—
Commercial
Real estate-commercial		108,318		—		—		552		552		108,870		—
Real estate-residential		20,698		373		—		50		423		21,121		—
Real estate-multi-family		17,814		—		—		—		—		17,814		—
Construction loans		6,952		—		—		4,649		4,649		11,601		—
Commercial and industrial loans		5,193		—		9		—		9		5,202		—
Consumer
Home equity and second mortgage		39,115		94		5		143		242		39,357		—
Other consumer		1,741		2		1		11		14		1,755		—
Total	$	516,875	$	1,432	$	15	$	7,577	$	9,024	$	525,899	$	—

	At December 31, 2012
	Current		30-59 Days past due		60-89 Days past due		Loans past due 90 days or more		Total past due		Total loans		Recorded investment over 90 days and accruing interest
	(in thousands)
Residential
Residential mortgages	$	319,982	$	1,161	$	329	$	2,193	$	3,683	$	323,665	$	—
Commercial
Real estate-commercial		102,868		800		—		1,098		1,898		104,766		—
Real estate-residential		21,488		31		—		51		82		21,570		—
Real estate-multi-family		19,118		—		—		—		—		19,118		—
Construction loans		11,494		—		—		4,794		4,794		16,288		—
Commercial and industrial loans		4,646		—		—		—		—		4,646		—
Consumer
Home equity and second mortgage		39,842		34		124		143		301		40,143		—
Other consumer		1,824		—		3		8		11		1,835		—
Total	$	521,262	$	2,026	$	456	$	8,287	$	10,769	$	532,031	$	—

Activity in the allowance for loan losses for the three months ended March 31, 2013 and 2012 is summarized as follows:

	Balance January 1, 2013		Provision			Charge-offs			Recoveries		Balance March 31, 2013
	(in thousands)
Residential
Residential mortgages	$	1,849	$	49		$	(98	)	$	—	$	1,800
Commercial
Real estate-commercial		1,754		(8	)		(435	)		—		1,311
Real estate-residential		608		52			(59	)		—		601
Real estate-multi-family		245		(8	)		—			—		237
Construction loans		1,697		297			(111	)		11		1,894
Commercial and industrial loans		119		3			—			3		125
Consumer
Home equity and second mortgage		251		(33	)		(15	)		8		211
Other consumer		11		3			(3	)		—		11
Unallocated		388		84			—			—		472
Total	$	6,922	$	439		$	(721	)	$	22	$	6,662

	Balance January 1, 2012		Provision			Charge-offs			Recoveries		Balance March 31, 2012
	(in thousands)
Residential
Residential mortgages	$	2,194	$	151		$	(399	)	$	7	$	1,953
Commercial
Real estate-commercial		2,819		(362	)		(623	)		—		1,834
Real estate-residential		464		190			—			—		654
Real estate-multi-family		358		(8	)		—			—		350
Construction loans		1,260		519			(608	)		—		1,171
Commercial and industrial loans		138		(97	)		—			5		46
Consumer
Home equity and second mortgage		448		(139	)		—			—		309
Other consumer		22		(13	)		(2	)		1		8
Unallocated		397		259			—			—		656
Total	$	8,100	$	500		$	(1,632	)	$	13	$	6,981

Despite the above allocation, the allowance for credit losses is general in nature and is available to absorb losses from any portfolio segment.

Loans receivable include certain loans that have been modified as troubled debt restructurings ("TDRs"), where economic concessions have been granted to borrowers experiencing financial difficulties. The objective for granting the concessions is to maximize the recovery of the investment in the loan and may include reductions in the interest rate, payment extensions, forgiveness of interest or principal, forbearance or other actions. TDRs are classified as nonperforming at the time of restructuring and typically return to performing status after considering the borrower's positive repayment performance for a reasonable period of time, usually six months.

Loans modified in a TDR are evaluated individually for impairment based on the present value of expected cash flows or the fair value of the underlying collateral less selling costs for collateral dependent loans. If the value of the modified loan is less than the recorded investment in the loan, impairment is recognized through an increase by an additional provision to the allowance for loan losses. In periods subsequent to modification, TDRs are evaluated for possible additional impairment.

The following table presents loans classified as TDRs segregated by class for the period indicated:

	For the three months ended March 31, 2012
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post Modification Outstanding Recorded Investment
Residential	(dollars in thousands)
Residential mortgage		1	$	852	$	825
Total		1	$	852	$	825

During the first quarter of 2012, a TDR totaling $167,000 which had been previously identified as in default of its modified terms was repaid and a $40,000 loss was charged to the allowance for loan losses.

There were no TDRs during the three months ended March 31, 2013.

The following tables present the ending balance of the allowance for loan losses and ending loan balance by portfolio and by class based on impairment method as of March 31, 2013:


	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	217	$	1,583	$	1,800
Commercial
Real estate-commercial		—		1,311		1,311
Real estate-residential		—		601		601
Real estate-multi-family		—		237		237
Construction loans		1,543		351		1,894
Commercial and industrial loans		—		125		125
Consumer
Home equity and second mortgage		—		211		211
Other consumer		—		11		11
Unallocated		—		472		472
Total	$	1,760	$	4,902	$	6,662

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	2,114	$	318,065	$	320,179
Commercial
Real estate-commercial		552		108,318		108,870
Real estate-residential		50		21,071		21,121
Real estate-multi-family		—		17,814		17,814
Construction loans		4,649		6,952		11,601
Commercial and industrial loans		—		5,202		5,202
Consumer
Home equity and second mortgage		—		39,357		39,357
Other consumer		—		1,755		1,755
Total	$	7,365	$	518,534	$	525,899

The following tables present the ending balance of the allowance for loan losses and ending loan balance by portfolio and by class based on impairment method as of December 31, 2012:

	Evaluated for impairment
Allowance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	218	$	1,631	$	1,849
Commercial
Real estate-commercial		296		1,458		1,754
Real estate-residential		4		604		608
Real estate-multi-family		—		245		245
Construction loans		1,029		668		1,697
Commercial and industrial loans		—		119		119
Consumer
Home equity and second mortgage		—		251		251
Other consumer		—		11		11
Unallocated		—		388		388
Total	$	1,547	$	5,375	$	6,922

	Evaluated for impairment
Loan balance	Individually		Collectively		Total
	(in thousands)
Residential
Residential mortgages	$	2,137	$	321,528	$	323,665
Commercial
Real estate-commercial		1,098		103,668		104,766
Real estate-residential		51		21,519		21,570
Real estate-multi-family		—		19,118		19,118
Construction loans		4,794		11,494		16,288
Commercial and industrial loans		—		4,646		4,646
Consumer
Home equity and second mortgage		—		40,143		40,143
Other consumer		—		1,835		1,835
Total	$	8,080	$	523,951	$	532,031