Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2012

Loans and Allowance for Loan Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN LOSSES

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectibility of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

Allowance for Loan Losses

The allowance for loan losses is established to cover management’s estimate of probable credit losses at the balance sheet date through a provision for loan losses charged to earnings. 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.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, equity lines of credit, commercial real estate, construction, commercial, indirect auto and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the six months ended June 30, 2012 or during fiscal year 2011.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate and home equity loans – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. Loans in this segment are generally collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily secured by income-producing properties throughout New England. The underlying cash flows generated by such properties may be adversely impacted by a downturn in the economy and increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management obtains rent rolls annually and continually monitors the cash flows of these loans.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and business spending, will have an effect on the credit quality in this segment.

Indirect auto loans – Loans in this segment are secured installment loans that are originated through a network of select regional automobile dealerships. The Company’s interest in the vehicle is secured with a recorded lien on the state title of each automobile. Repayments are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged at the time of repossession. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Consumer loans - Loans in this segment include secured and unsecured consumer loans. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Allocated Component of the Allowance for Loan Losses:

The allocated component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. 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.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are classified as impaired.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Generally, TDRs are measured using the discounted cash flow method except in instances where foreclosure is probable in which case the fair value of the collateral is used. All other impaired loans are collateral dependent and are measured through the collateral method. All TDRs are considered to be impaired. Beginning in 2011, all loans on non-accrual status, with the exception of indirect auto and consumer loans, are considered to be impaired. Prior to 2011, all loans on non-accrual status, with the exception of homogeneous residential loans, indirect auto and consumer loans, were considered to be impaired. When the measure of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the valuation allowance.

Unallocated Component of the Allowance for Loan Losses:

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. At June 30, 2012 (unaudited) and December 31, 2011, the Company did not have an unallocated component.

Loans consisted of the following :

	June 30, 2012						December 31, 2011
	Amount			Percent			Amount			Percent
	(unaudited)
Mortgage loans:
Residential one-to-four family	$	203,546			34.20	%	$	192,295			37.57	%
Commercial real estate loans (1)		222,974			37.47			166,261			32.49
Equity lines of credit		59,191			9.95			50,015			9.77
Construction loans		13,710			2.30			15,198			2.97
Total mortgage loans		499,421			83.92			423,769			82.80
Commercial loans		24,739			4.16			20,626			4.03
Consumer loans:
Indirect auto loans		70,224			11.8			66,401			12.97
Other consumer loans (2)		724			0.12			998			0.20
		95,687			16.08			88,025			17.20
Total loans		595,108			100.00	%		511,794			100.00	%
Net deferred loan costs		2,609						2,523
Net unamortized mortgage premiums		471						423
Allowance for loan losses		(5,360	)					(4,776	)
Total loans, net	$	592,828					$	509,964

(1) Includes multi-family real estate loans.

(2) Other consumer loans consist primarily of passbook loans, consumer lines of credit and overdraft protection, and consumer unsecured loans.

The following tables present the activity in the allowance for loan losses for the three and six months ended June 30, 2012 and 2011 (unaudited) and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment evaluation method at June 30, 2012 (unaudited) and December 31, 2011. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest or any deferred loan fees or costs, as amounts are not significant.

	Three Months Ended June 30, 2012
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	1,013	$	172		$	(127	)	$	28	$	1,086
Commercial real estate		2,302		318			—			—		2,620
Construction		163		5			—			—		168
Commercial		356		34			—			—		390
Equity lines of credit		651		179			(455	)		—		375
Indirect auto		669		119			(93	)		7		702
Consumer		22		(2	)		(4	)		3		19
Total	$	5,176	$	825		$	(679	)	$	38	$	5,360
	Three Months Ended June 30, 2011
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	986	$	243		$	(210	)	$	—	$	1,019
Commercial real estate		1,414		(39	)		—			—		1,375
Construction		147		39			—			—		186
Commercial		252		66			(24	)		—		294
Equity lines of credit		200		200			(83	)		—		317
Indirect auto		310		222			(8	)		—		524
Consumer		19		5			(8	)		2		18
Unallocated		—		6			—			—		6
Total	$	3,328	$	742		$	(333	)	$	2	$	3,739
	Six Months Ended June 30, 2012
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	986	$	199		$	(127	)	$	28	$	1,086
Commercial real estate		1,969		651			—			—		2,620
Construction		188		(20	)		—			—		168
Commercial		321		69			—			—		390
Equity lines of credit		632		198			(455	)		—		375
Indirect auto		664		197			(170	)		11		702
Consumer		16		12			(14	)		5		19
Total	$	4,776	$	1,306		$	(766	)	$	44	$	5,360
	Six Months Ended June 30, 2011
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	1,057	$	172		$	(210	)	$	—	$	1,019
Commercial real estate		1,136		239			—			—		1,375
Construction		140		46			—			—		186
Commercial		261		94			(61	)		—		294
Equity lines of credit		236		164			(83	)		—		317
Indirect auto		38		494			(8	)		—		524
Consumer		21		3			(12	)		6		18
		—		6			—			—		6
Total	$	2,889	$	1,218		$	(374	)	$	6	$	3,739

	June 30, 2012 (unaudited)
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential one-to-four family	$	2,569	$	81	$	200,977	$	1,005	$	203,546	$	1,086
Commercial real estate		—		—		222,974		2,620		222,974		2,620
Construction		—		—		13,710		168		13,710		168
Commercial		4		—		24,735		390		24,739		390
Equity lines of credit		693		6		58,498		369		59,191		375
Indirect auto		—		—		70,224		702		70,224		702
Consumer		—		—		724		19		724		19
Total	$	3,266	$	87	$	591,842	$	5,273	$	595,108	$	5,360
	December 31, 2011
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential one-to-four family	$	3,149	$	97	$	189,146	$	889	$	192,295	$	986
Commercial real estate		—		—		166,261		1,969		166,261		1,969
Construction		—		—		15,198		188		15,198		188
Commercial		155		—		20,471		321		20,626		321
Equity lines of credit		1,123		314		48,892		318		50,015		632
Indirect auto		—		—		66,401		664		66,401		664
Consumer		—		—		998		16		998		16
Total	$	4,427	$	411	$	507,367	$	4,365	$	511,794	$	4,776

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of June 30, 2012 (unaudited):

	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Specific Allowance		Income Recognized
Residential one-to-four family	$	204	$	204	$	699	$	81	$	7
Commercial real estate		—		—		—		—		—
Construction		—		—		—		—		—
Commercial		—		—		—		—		—
Equity lines of credit		116		199		644		6		—
Indirect auto		—		—		—		—		—
Consumer		—		—		—		—		—
Totals	$	320	$	403	$	1,343	$	87	$	7

	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Income Recognized
Residential one-to-four family	$	2,365	$	2,491	$	2,417	$	2
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Commercial		4		4		48		2
Equity lines of credit		577		1,032		425		6
Indirect auto		—		—		—		—
Consumer		—		—		—		—
Totals	$	2,946	$	3,527	$	2,890	$	10

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2011:

	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Specific Allowance		Income Recognized
Residential one-to-four family	$	705	$	705	$	403	$	97	$	21
Commercial real estate		—		—		—		—		—
Construction		—		—		—		—		—
Commercial		—		—		3		—		—
Equity lines of credit		731		731		514		314		8
Indirect auto		—		—		—		—		—
Consumer		—		—		—		—		—
Totals	$	1,436	$	1,436	$	920	$	411	$	29

	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Income Recognized
Residential one-to-four family	$	2,444	$	2,653	$	1,685	$	53
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Commercial		155		155		56		7
Equity lines of credit		392		475		374		12
Indirect auto		—		—		—		—
Consumer		—		—		—		—
Totals	$	2,991	$	3,283	$	2,115	$	72

The following is a summary of past due and non-accrual loans:

	June 30, 2012 (unaudited)
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	1	$	260	$	2,569	$	2,830	$	—	$	2,569
Commercial real estate		—		—		—		—		—		—
Equity lines of credit		98		—		493		591		—		693
Construction		1,210		—		—		1,210		—		—
Other loans:
Commercial		2		—		—		2		—		4
Indirect auto		136		43		—		179		—		—
Consumer		—		—		1		1		—		1
	$	1,447	$	303	$	3,063	$	4,813	$	—	$	3,267
	December 31, 2011
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	51	$	1,188	$	1,880	$	3,119	$	—	$	3,149
Commercial real estate		—		—		—		—		—		—
Equity lines of credit		634		—		847		1,481		—		1,123
Construction		—		—		—		—		—		—
Other loans:
Commercial		10		—		7		17		—		155
Indirect auto		209		23		—		232		—		—
Consumer		—		1		—		1		—		—
	$	904	$	1,212	$	2,734	$	4,850	$	—	$	4,427

Credit Quality Information

The Company utilizes a seven grade internal loan rating system for commercial, commercial real estate and construction loans, and a five grade internal loan rating system for certain residential real estate, home equity and consumer loans that are rated if the loans become delinquent.

Loans rated 1 - 3: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial, commercial real estate loans, and construction loans. On an annual basis, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

On a quarterly basis, the Company formally reviews the ratings on all residential real estate and home equity loans if they have become delinquent. Criteria used to determine rating consists of loan-to-value and days delinquent.

The following table presents the Company’s loans by risk rating at June 30, 2012 (unaudited) and December 31, 2011. There were no loans rated as 6 (“doubtful”) or 7 (“loss”) at the dates indicated.

	June 30, 2012
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total
Residential one-to-four family	$	3,169	$	260	$	2,986	$	197,131	$	203,546
Commercial real estate		215,093		7,881		—		—		222,974
Construction		12,157		—		1,553		—		13,710
Commercial		24,645		71		23		—		24,739
Home equity		899		98		493		57,701		59,191
Indirect auto		—		—		—		70,224		70,224
Consumer		—		—		—		724		724
Total	$	255,963	$	8,310	$	5,055	$	325,780	$	595,108
	December 31, 2011
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total
Residential one-to-four family	$	1,940	$	1,238	$	3,573	$	185,544	$	192,295
Commercial real estate		165,134		1,127		—		—		166,261
Construction		13,642		—		1,556		—		15,198
Commercial		20,446		—		180		—		20,626
Home equity		—		359		1,123		48,533		50,015
Indirect auto		—		—		—		66,401		66,401
Consumer		—		—		—		998		998
Total	$	201,162	$	2,724	$	6,432	$	301,476	$	511,794

(A) Residential real estate, home equity, indirect auto loans and consumer loans are not formally risk rated by the Company unless the loans become delinquent.

The Company periodically modifies loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. The Company generally does not forgive principal or interest on loans or modify the interest rates on loans to rates not otherwise available in the market for loans with similar risk characteristics as the restructured debt. During the six months ended June 30, 2012 and for the year ended December 31, 2011, no loans were modified under a troubled debt restructuring. At June 30, 2012, the Company had $607,000 of troubled debt restructurings related to two loans, which were both modified in 2010. One of these loans was a one-to-four family residential mortgage loan and the other was a home equity line of credit.

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Most of these loans are sold without recourse except for customary representations and warranties provided in sales transactions, and the Company releases the servicing rights. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company also periodically sells auto loans to other financial institutions without recourse except for customary representations and warranties provided in sales transactions, and the Company generally provides servicing for these loans. At June 30, 2012 (unaudited) and December 31, 2011, residential loans previously sold and serviced by the Company were $73.3 million and $28.3 million, respectively. At June 30, 2012 (unaudited) and December 31, 2011, indirect auto loans previously sold and serviced by the Company were $71.2 million and $28.3 million, respectively.

At June 30, 2012 (unaudited) and December 31, 2011, loans sold with recourse amounted to $1.5 million. See Note 7. The Company has not incurred, nor expects to incur, any losses related to the loans sold with recourse.