(3)Loans

Major classifications of loans at the dates indicated, are as follows:

(Dollars in thousands)	March 31, 2015			December 31, 2014
Residential real estate mortgage loans:
1-4 family	$	144,630		$	134,084
Home equity loans and lines of credit	78,437			79,771
Total residential real estate mortgage loans	223,067			213,855

Commercial:
Commercial real estate	115,128			108,025
Commercial business	6,026			7,698
Commercial construction	6,595			8,181
SBA	38,325			44,032
Total commercial loans	166,074			167,936
Consumer	1,267			1,372
Total loans	390,408			383,163

Allowance for loan losses	(1,975		)	(1,942		)
Net deferred loan costs	2,809			2,688
Loans, net	$	391,242		$	383,909

Loan Segments

One-to four-family residential real estate and home equity — Loans in these segments are collateralized by owner-occupied residential real estate and repayment is dependent on the credit quality of the individual borrower. The Bank generally has first liens on one-to four-family residential real estate loans and first or second liens on property securing home equity loans and equity lines-of-credit. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in these segments.

Commercial — Commercial loan segments include commercial real estate, commercial and industrial loans for businesses and construction financing for business/properties located principally in Rhode Island. For commercial real estate loans, the underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Non-real estate commercial loans are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. Commercial construction generally represent loans to finance construction of retail and office space. Commercial loans also include loans made under the SBA 504 program which is an economic development program that finances the expansion of small businesses. The Bank generally provides 50% of the projected costs, and the loan is secured by a first lien on the commercial property. The SBA does not provide a guarantee on loans made under the SBA 504 program. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Management monitors the cash flows of these loans.

SBA — Loans in this segment include commercial loans underwritten using SBA guidelines for the SBA’s 7(a) program and include both guaranteed and unguaranteed portions of the same loans. Currently, under the SBA 7(a) program, loans may qualify for guarantees up to 85% of principal and accrued interest up to a maximum SBA guarantee of $3.75 million per borrower and related entities. The Bank does not treat the SBA guarantee as a substitute for a borrower meeting reasonable credit standards. SBA guarantees are generally sought on loans that exhibit minimum capital levels, a short time in business, lower collateral coverage or maximum loan terms beyond the Bank’s normal underwriting criteria. For a number of SBA loans, the Bank has sold portions of certain loans and retains the unguaranteed portion while continuing to service the entire loan. The guaranteed portion of SBA loans in the Bank’s portfolio is not allocated a general reserve because the Bank has not experienced losses on such loans and management expects the guarantees will be effective, if necessary.

Consumer — This segment includes unsecured and vehicle loans and repayment is dependent on the credit quality of the individual borrower. Economic trends determined by unemployment rates and other key economic indicators are closely correlated to the credit quality of these loans.

Allowance for Loan Losses

Allowance for Loan Loss Methodology

The allowance for loan losses is established as losses are estimated to have occurred 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. For impaired loans that are deemed collateral dependent, the recorded balance of the loan is reduced by a charge-off to fair value of the collateral net of estimated selling costs.

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 and specific components as described below.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by loan segments. Management uses a ten year historical loss period to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; charge-off trends over the past three year period; weighted average risk ratings; loan concentrations; management’s assessment of internal factors; and management’s assessment of external factors such as interest rates, real estate markets and local and national economic factors. There were no changes in the Bank’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 2015 and the year ended December 31, 2014.

The Corporation evaluates the need for a specific allowance when loans are determined to be impaired. Loss is measured by determining the present value of expected future cash flows or, for collateral-dependent loans, the fair value of the collateral less estimated selling expenses. Factors in identifying a specific problem loan include: (1) the strength of the customer’s personal or business cash flows; (2) the availability of other sources of repayment; (3) the amount due or past due; (4) the type and value of collateral; (5) the strength of the collateral position; (6) the estimated cost to sell the collateral; and (7) the borrower’s effort to cure the delinquency. In addition, for loans secured by real estate, the Corporation considers the extent of any past due and unpaid property taxes applicable to the property serving as collateral on the mortgage.

Credit Quality Indicators

Commercial and SBA loans are risk rated based on key factors such as management ability, financial condition, debt repayment ability, collateral, industry conditions and loan structure. Risk ratings 1 through 5 are considered “pass” rated, risk rating 5.5 is considered “watch list”, risk rating 6 is considered “special mention”, while risk ratings 7, 8 and 9 are considered “classified” ratings.

Risk Ratings 1-5: Loans in this category are pass rated loans with low to average risk.

Risk rating 5.5 — Watch List: loans in this category exhibit the characteristics associated with 5 risk-rated loans, but possess negative factors that warrant increased oversight yet do not warrant a negative risk rating. Factors may include short-term negative operating trends, temporary liquidity shortfalls, modest delinquency, missing or incomplete financial information, or negative balance sheet trends.

Risk Rating 6 — Special Mention: these loans have potential weaknesses and require management’s close attention. If these weaknesses are not addressed, they may weaken the prospects for repayment at a future date. Special mention assets do not expose the institution to sufficient risk to warrant a classified rating.

Risk Rating 7 — Substandard: loans in this category are inadequately protected by the current financial condition and repayment ability of the borrower or pledged collateral, if any. These assets have a well-defined weakness(es) that jeopardizes the repayment of the debt in full, and are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Risk Rating 8 — Doubtful: loans have all the weaknesses of those classified substandard. In addition, it is highly unlikely that a doubtful asset can be collected or liquidated in full. The possibility of loss is extremely high. However, because of certain important and reasonably specific pending factors, which may work to strengthen the asset, its classification as a loss is deferred until the asset’s status can be better determined.

Risk Rating 9 — Loss: loans classified as loss are considered uncollectible and of such little value that they are no longer considered bankable. This classification does not mean that the asset has no recovery or salvage value. However, it is not practical or desirable to defer writing off the asset even though partial recovery may occur in the future.

On an annual basis, or more often if needed, the Bank formally reviews the ratings on commercial and SBA loans. On an annual basis, the Bank 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. Credit quality for residential real estate mortgage and consumer loans is determined by monitoring loan payment history and on-going communications with borrowers.

The following table presents the credit risk profile by internally assigned risk rating category at the dates indicated:

	March 31, 2015
	Commercial		Commercial		Commercial
(Dollars in thousands)	Real Estate		Business		Construction		SBA		Total
Loans rated 1-5	111,662		6,026		6,108		34,433		158,229
Loans rated 5.5	1,560		—		—		848		2,408
Loans rated 6	704		—		—		1,392		2,096
Loans rated 7	1,202		—		487		1,652		3,341
Loans rated 8	—		—		—		—		—
	$	115,128	$	6,026	$	6,595	$	38,325	$	166,074

	December 31, 2014
	Commercial		Commercial		Commercial
(Dollars in thousands)	Real Estate		Business		Construction		SBA		Total
Loans rated 1-5	$	102,261	$	7,698	$	7,879	$	38,778	$	156,616
Loans rated 5.5	3,964		—		—		1,159		5,123
Loans rated 6	708		—		—		1,443		2,151
Loans rated 7	1,092		—		302		2,652		4,046
Loans rated 8	—		—		—		—		—
	$	108,025	$	7,698	$	8,181	$	44,032	$	167,936

Past Due and Non-Accrual Loans

The accrual of interest on loans is discontinued at the time the loan is 90 days past due. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual at an earlier date if collection of principal or interest is considered doubtful. All interest accrued, but not collected for loans that are placed on non-accrual, 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.

The following table presents past due loans as of the dates indicated.

	March 31, 2015
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Past Due > 90 Days and Still Accruing		Loans on Non-accrual
Residential real estate:
Residential 1-4 family	$	1,083	$	—	$	2,329	$	342	$	—	$	5,376
Home equity loans and lines of credit	362		74		213		649		—		467
Commercial real estate	—		—		—		—		—		119
Commercial business	—		—		—		—		—		—
Commercial construction	—		—		—		—		—		—
SBA	—		70		75		145		—		89
Consumer	—		—		—		—		—		—
Total gross loans	$	1,445	$	144	$	2,617	$	4,206	$	—	$	6,051

	December 31, 2014
(Dollars in thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Past Due > 90 Days and Still Accruing		Loans on Non-accrual
Residential real estate:
Residential 1-4 family	$	—	$	580	$	2,195	$	2,775	$	—	$	5,870
Home equity loans and lines of credit	301		8		153		462		—		370
Commercial real estate	—		—		—		—		—		—
Commercial business	—		84		—		84		—		—
Commercial construction	—		—		—		—		—		—
SBA	—		20		189		209		—		204
Consumer	—		8		—		8		—		—
Total gross loans	$	301	$	700	$	2,537	$	3,538	$	—	$	6,444

Impaired Loans

A loan is considered impaired when, based on current information and events, it is probable that the Bank 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 Bank periodically may agree to modify the contractual terms of loans, such as a reduction in interest rate of the loan for some period of time, an extension of the maturity date or an extension of time to make payments with the delinquent payments added to the end of the loan term. 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 initially classified as impaired. Loans on non-accrual status at the date of modification are initially classified as non-accruing troubled debt restructurings. TDRs may be returned to accrual status after a period of satisfactory payment performance according to the terms of the restructuring, generally six months of current payments.

The following tables set forth the recorded investment in impaired loans and the related specific allowance allocated as of the dates indicated.

	March 31, 2015
(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related allowance
Residential real estate:
Residential 1-4 family	$	6,167	$	5,982	$	3,752	$	2,230	$	201
Home equity loans & lines of credit	1,026		945		902		43		7
Commercial real estate	119		119		119		—		—
SBA	1,679		1,678		1,678		—		—
Consumer	15		15		—		15		4
Total	$	9,006	$	8,739	$	6,451	$	2,288	$	212

	December 31, 2014
(Dollars in thousands)	Unpaid contractual principal balance		Total recorded investment in impaired loans		Recorded investment with no allowance		Recorded investment with allowance		Related allowance
Residential real estate:
Residential 1-4 family	$	6,849	$	6,664	$	3,658	$	3,006	$	144
Home equity loans & lines of credit	889		800		693		107		68
SBA	1,808		1,806		1,671		135		13
Consumer	25		25		9		16		4
Total	$	9,571	$	9,295	$	6,031	$	3,264	$	229

Of the $1.7 million and $1.8 million of impaired SBA loans at March 31, 2015 and at December 31, 2014, guaranteed portions of such loans amounted to $1.4 million at both dates.

The following table presents the average recorded investment in impaired loans and the related interest recognized during the periods indicated.

	Three Months Ended March 31, 2015				Three Months Ended March 31, 2014
(Dollars in thousands)	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Residential 1-4 family	$	6,428	$	45	$	6,684	$	36
Home equity loans & lines of credit	850		3		342		3
Commercial real estate	60		—		—		—
SBA	1,740		345		2,464		88
Consumer	22		—		31		1
Total	$	9,100	$	83	$	9,521	$	128

Troubled Debt Restructurings (TDRs)

Loans are designated as a TDR when, as part of an agreement to modify the original contractual terms of the loan, the Bank grants a concession on the terms, that would not otherwise be considered, as a result of financial difficulties of the borrower. Typically, such concessions may consist of a reduction in interest rate to a below market rate, taking into account the credit quality of the note, or a deferment or reduction of payments, principal or interest, which materially alters the Bank’s position or significantly extends the note’s maturity date, such that the present value of cash flows to be received is materially less than those contractually established at the loan’s origination. All loans that are modified are reviewed by the Bank to identify if a TDR has occurred. TDRs are included in the impaired loan category and as such, these loans are individually evaluated for impairment and a specific reserve is assigned for the amount of the estimated credit loss. Total TDR loans, included in impaired loans as of March 31, 2015 and December 31, 2014 were $7.1 million and $7.2 million, respectively. TDR loans on accrual status amounted to $2.7 million and $2.9 million at March 31, 2015 and December 31, 2014, respectively.

Troubled debt restructuring agreements entered into during the period indicated are as follows:

	Three Months Ended March 31, 2015
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Residential 1-4 family	1	$	289	$	289
Home equity	3	$	113	$	113
Commercial real estate	1	119		119
Total	5	$	521	$	521

The troubled debt restructurings described above had a $4,000 impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2015.

Troubled debt restructurings that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:

	Three Months Ended March 31, 2015
(Dollars in thousands)	Number of TDRs that defaulted	Post-modification outstanding recorded investment
Residential 1-4 family	2	$	470
SBA	1	9
Total	3	$	479

Troubled debt restructuring agreements entered into during the period indicated are as follows:

	Three Months Ended March 31, 2014
(Dollars in thousands)	Number of restructurings	Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Residential 1-4 family	3	$	834	$	834
Total	3	$	834	$	834

The troubled debt restructurings described above had a $17,000 impact to the allowance for loan losses and resulted in no charge-offs during the three months ended March 31, 2014.

Troubled debt restructurings that subsequently defaulted within 12 months of restructuring are as follows during the period indicated:

	Three Months Ended March 31, 2014
(Dollars in thousands)	Number of TDRs that defaulted	Post-modification outstanding recorded investment
Residential 1-4 family	4	$	878
Total	4	$	878

Allowance for loan loss activity

Changes in the allowance for loan losses by segment are presented below:

Three Months Ended March 31, 2015

(Dollars in thousands)	Residential 1-4 family		Home Equity			Commercial Real Estate		Commercial Business			Commercial Construction			SBA			Consumer			Total
Allowance at December 31, 2014	$	654	$	584		$	400	$	28		$	30		$	236		$	10		$	1,942
Provision (credit)	111		10			25		(4		)	(4		)	(34		)	(5		)	99
Loans charged-off	—		(75		)	—		—			—			(9		)	—			(84		)
Recoveries	—		—			—		—			—			14			4			18
Allowance at March 31, 2015	$	765	$	519		$	425	$	24		$	26		$	207		$	9		$	1,975

Three Months Ended March 31, 2014

(Dollars in thousands)	Residential 1-4 family		Home Equity			Commercial Real Estate		Commercial Business			Commercial Construction		SBA		Consumer			Total
Allowance at December 31, 2013	$	462	$	605		$	321	$	29		$	24	$	197	$	18		$	1,656
Provision (credit)	86		6			13		(3		)	9		62		(6		)	167
Loans charged-off	—		(22		)	—		—			—		—		—			(22		)
Recoveries	4		11			—		—			—		2		3			20
Allowance at March 31, 2014	$	552	$	600		$	334	$	26		$	33	$	261	$	15		$	1,821

The allowance for loan losses and loan balances by impaired and non-impaired components are as follows at the dates indicated:

March 31, 2015

(Dollars in thousands)	Residential 1-4 family		Home Equity		Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer		Total
Allowance for impaired loans	$	201	$	7	$	—	$	—	$	—	$	—	$	4	$	212
Allowance for non-impaired loans	564		512		425		24		26		207		5		1,763
Total	$	765	$	519	$	425	$	24	$	26	$	207	$	9	$	1,975
Impaired loans	$	5,982	$	945	$	119	$	—	$	—	$	1,678	$	15	$	8,738
Non-impaired loans	138,648		77,492		115,009		6,026		6,595		36,647		1,252		383,024

Total loans	$	144,630	$	78,437	$	115,128	$	6,026	$	6,595	$	38,325	$	1,267	$	390,408

December 31, 2014

(Dollars in thousands)	Residential 1-4 family		Home Equity		Commercial Real Estate		Commercial Business		Commercial Construction		SBA		Consumer		Total
Allowance for impaired loans	$	144	$	68	$	—	$	—	$	—	$	13	$	4	$	229
Allowance for non-impaired loans	510		516		400		28		30		223		6		1,713
Total	$	654	$	584	$	400	$	28	$	30	$	236	$	10	$	1,942
Impaired loans	$	6,664	$	800	$	—	$	—	$	—	$	1,806	$	25	$	9,295
Non-impaired loans	$	127,420	78,971		108,025		7,698		8,181		42,226		1,347		373,868

Total loans	$	134,084	$	79,771	$	108,025	$	7,698	$	8,181	$	44,032	$	1,372	$	383,163