NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three months ended March 31, 2014 and 2013:



	Commercial				Commercial		Residential		Consumer
	and				Real		Real		and
(Dollars in	Industrial		Construction		Estate		Estate		Other		Unallocated		Total
thousands)
March 31, 2014
Beginning balance	$	222	$	308	$	3,399	$	941	$	16	$	535	$	5,421
Charge-offs		-		-		(358)		(86)		(13)		-		(457)
Recoveries		12		-		4		1		3		-		20
Provision		55		7		642		6		13		(270)		453
Ending balance	$	289	$	315	$	3,687	$	862	$	19	$	265	$	5,437

March 31, 2013
Beginning balance	$	271	$	223	$	3,395	$	869	$	38	$	180	$	4,976
Charge-offs		(6)		(42)		(739)		(28)		(9)		-		(824)
Recoveries		-		-		7		-		5		-		12
Provision		10		220		789		58		(22)		87		1,142
Ending balance	$	275	$	401	$	3,452	$	899	$	12	$	267	$	5,306

The following table presents the balance of the allowance of loan losses and loans receivable by class at March 31, 2014 and December 31, 2013, disaggregated on the basis of our impairment methodology.



	Allowance for Loan Losses						Loans Receivable
			Balance		Balance
			Related to		Related to
			Loans		Loans
			Individually		Collectively				Individually		Collectively
			Evaluated for		Evaluated for				Evaluated for		Evaluated for
(Dollars in thousands)	Balance		Impairment		Impairment		Balance		Impairment		Impairment

March 31, 2014
Commercial and industrial	$	289	$	-	$	289	$	19,635	$	-	$	19,635
Construction		315		-		315		6,852		-		6,852
Commercial real estate		3,687		559		3,128		276,101		9,679		266,422
Residential real estate		862		105		757		108,889		2,492		106,397
Consumer and other loans		19		3		16		1,629		3		1,626
Unallocated		265		-		-		-		-		-
Total	$	5,437	$	667	$	4,505	$	413,106	$	12,174	$	400,932

December 31, 2013
Commercial and industrial	$	222	$	-	$	222	$	15,205	$	-	$	15,205
Construction		308		-		308		7,307		-		7,307
Commercial real estate		3,399		322		3,077		260,664		10,894		249,770
Residential real estate		941		163		778		107,992		2,626		105,366
Consumer and other loans		16		-		16		1,617		-		1,617
Unallocated		535		-		-		-		-		-
Total	$	5,421	$	485	$	4,401	$	392,785	$	13,520	$	379,265

An age analysis of loans receivable which were past due as of March 31, 2014 and December 31, 2013, is as follows:



													Recorded
													Investment
					Greater						Total		> 90 Days
	30-59 Days		60-89 days		Than		Total Past				Financing		and
(Dollars in thousands)	Past Due		Past Due		90 Days (a)		Due		Current		Receivables		Accruing

March 31, 2014
Commercial and industrial	$	4	$	-	$	-	$	4	$	19,631	$	19,635	$	-
Construction		-		-		-		-		6,852		6,852		-
Commercial real estate		783		1,242		8,489		10,514		265,587		276,101		-
Residential real estate		810		247		2,062		3,119		105,770		108,889		-
Consumer and other		3		-		5		8		1,621		1,629		2
Total	$	1,600	$	1,489	$	10,556	$	13,645	$	399,461	$	413,106	$	2

December 31, 2013
Commercial and industrial	$	13	$	-	$	-	$	13	$	15,192	$	15,205	$	-
Construction		-		-		-		-		7,307		7,307		-
Commercial real estate		2,139		775		9,823		12,737		247,927		260,664		123
Residential real estate		495		247		2,192		2,934		105,058		107,992		-
Consumer and other		7		1		-		8		1,609		1,617		-
Total	$	2,654	$	1,023	$	12,015	$	15,692	$	377,093	$	392,785	$	123


(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.

Loans for which the accrual of interest has been discontinued at March 31, 2014 and December 31, 2013, were:



(Dollars in thousands)	March 31, 2014		December 31, 2013

Commercial real estate	$	8,489	$	9,700
Residential real estate		2,062		2,192
Consumer and other		3		-
Total	$	10,554	$	11,892

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans. It is management’s and the Board of Directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system as defined below is consistent with the system used by regulatory agencies and consistent with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets.

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.

Special Mention: This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments. The weaknesses require close supervision by management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted. Such loans are fully charged off.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of March 31, 2014 and December 31, 2013:



			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
March 31, 2014
Commercial and industrial	$	19,612	$	23	$	-	$	-	$	19,635
Construction		6,852		-		-		-		6,852
Commercial real estate		257,456		6,711		11,770		164		276,101
Residential real estate		106,147		140		2,602		-		108,889
Consumer and other		1,487		139		3		-		1,629
	$	391,554	$	7,013	$	14,375	$	164	$	413,106

December 31, 2013
Commercial and industrial	$	15,192	$	13	$	-	$	-	$	15,205
Construction		7,307		-		-		-		7,307
Commercial real estate		240,204		7,378		12,917		165		260,664
Residential real estate		104,383		871		2,738		-		107,992
Consumer and other		1,477		140		-		-		1,617
	$	368,563	$	8,402	$	15,655	$	165	$	392,785

The following table reflects information about our impaired loans by class as of March 31, 2014 and December 31, 2013:



		March 31, 2014						December 31, 2013
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance

With no related allowance recorded:
Commercial real estate	$	4,363	$	5,225	$	-	$	7,394	$	7,967	$	-
Residential real estate		1,678		1,703		-		1,849		1,874		-
Consumer and other		-		-		-		-		-		-

With an allowance recorded:
Commercial real estate		5,316		6,411		559		3,500		4,595		322
Residential real estate		814		907		105		777		871		163
Consumer and other		3		3		3		-		-		-

Total:
Commercial real estate		9,679		11,636		559		10,894		12,562		322
Residential real estate		2,492		2,610		105		2,626		2,745		163
Consumer and other		3		3		3		-		-		-
	$	12,174	$	14,249	$	667	$	13,520	$	15,307	$	485

The following table presents the average recorded investment and income recognized for the three months ended March 31, 2014 and 2013:


	For the Three Months Ended March 31, 2014				For the Three Months Ended March 31, 2013
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Construction	$	-	$	-	$	2,262	$	-
Commercial real estate		4,968		8		6,145		2
Residential real estate		1,845		20		1,771		-
Total impaired loans without a related allowance		6,813		28		10,178		2

With an allowance recorded:
Commercial and industrial		-		-		141		-
Construction		-		-		546		-
Commercial real estate		5,319		1		7,650		5
Residential real estate		849		4		1,477		3
Consumer and other		1		-		-		-
Total impaired loans with an allowance		6,169		5		9,814		8
Total impaired loans	$	12,982	$	33	$	19,992	$	10

We recognize income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to us. If these factors do not exist, we will record all payments as a reduction of principal on such loans.

Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:



(Dollars in thousands)		Commercial Real Estate	Residential Real Estate		Total

March 31, 2014
Performing	$	1,190	$	430	$	1,620
Non-performing		2,998		495		3,493
Total	$	4,188	$	925	$	5,113

December 31, 2013
Performing	$	1,195	$	433	$	1,628
Non-performing		3,000		496		3,496
Total	$	4,195	$	929	$	5,124

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of March 31, 2014, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

There were no troubled debt restructurings that occurred during the three months ended March 31, 2014. The following table summarizes troubled debt restructurings that occurred during the three months ended March 31, 2013:


		Pre-Modification		Post-Modification
		Outstanding		Outstanding
	Number of	Recorded		Recorded
(Dollars in thousands)	Loans	Investment		Investment

March 31, 2013
Commercial real estate	1	$	163	$	163
Residential real estate	1		302		302

The troubled debt restructurings presented in the table above resulted in an allocation of the allowance for credit losses of $44 thousand for the three months ended March 31, 2013. These specific reserves are included in the allowance for credit losses for loans individually evaluated for impairment. There were no charge-offs on the troubled debt restructurings presented in the table above during the three months ended March 31, 2013.

There were no troubled debt restructurings that occurred during the three months ended March 31, 2014, therefore, no allocation for the allowance for credit losses or charge-offs were required on loans modified as troubled debt restructurings during the three months ended March 31, 2014.

There were no troubled debt restructurings for which there was a payment default within twelve months following the date of the restructuring for the three months ended March 31, 2014 and 2013.