Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2013

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

NOTE 4 - Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio.

	June 30, 2013						December 31, 2012
(dollars in thousands)	Amount			% of Total			Amount			% of Total
Commercial
Owner occupied RE	$	181,257			26.4	%		158,790			24.6	%
Non-owner occupied RE		161,086			23.4	%		165,163			25.6	%
Construction		22,898			3.3	%		20,347			3.1	%
Business		116,513			17.0	%		114,169			17.7	%
Total commercial loans		481,754			70.1	%		458,469			71.0	%
Consumer
Real estate		97,172			14.1	%		86,559			13.4	%
Home equity		82,863			12.1	%		77,895			12.1	%
Construction		14,029			2.0	%		13,749			2.1	%
Other		11,664			1.7	%		9,277			1.4	%
Total consumer loans		205,728			29.9	%		187,480			29.0	%
Total gross loans, net of deferred fees		687,482			100.0	%		645,949			100.0	%
Less—allowance for loan losses		(9,561	)					(9,091	)
Total loans, net	$	677,921						636,858

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.

			June 30, 2013
(dollars in thousands)	One year or less		After one but within five years		After five years		Total
Commercial
Owner occupied RE	$	26,479		107,023		47,755		181,257
Non-owner occupied RE		49,855		89,356		21,875		161,086
Construction		8,227		9,266		5,405		22,898
Business		61,376		48,121		7,016		116,513
Total commercial loans		145,937		253,766		82,051		481,754
Consumer
Real estate		17,417		30,330		49,425		97,172
Home equity		4,332		22,453		56,078		82,863
Construction		8,233		1,422		4,374		14,029
Other		5,585		4,962		1,117		11,664
Total consumer loans		35,567		59,167		110,994		205,728
Total gross loans, net of deferred fees	$	181,504		312,933		193,045		687,482
Loans maturing after one year with:
Fixed interest rates							$	338,246
Floating interest rates								167,732
			December 31, 2012
	One year or less		After one but within five years		After five years		Total
Commercial
Owner occupied RE	$	23,833		92,681		42,276		158,790
Non-owner occupied RE		47,252		98,514		19,397		165,163
Construction		9,206		4,387		6,754		20,347
Business		57,947		50,084		6,138		114,169
Total commercial loans		138,238		245,666		74,565		458,469
Consumer
Real estate		12,907		27,702		45,950		86,559
Home equity		7,083		17,832		52,980		77,895
Construction		6,032		1,530		6,187		13,749
Other		5,475		2,826		976		9,277
Total consumer		31,497		49,890		106,093		187,480
Total gross loan, net of deferred fees	$	169,735		295,556		180,658		645,949
Loans maturing after one year with:
Fixed interest rates							$	314,396
Floating interest rates								161,818

Portfolio Segment Methodology

Commercial

Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. We apply historic grade-specific loss factors to each class of loans. In the development of our statistically derived loan grade loss factors, we observe historical losses over a relevant period for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring ("TDR"), whether on accrual or nonaccrual status.

Consumer

For consumer loans, we determine the allowance on a collective basis utilizing historic loss factors to represent our best estimate of inherent loss. We pool loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

Credit Quality Indicators

Commercial

We manage a consistent process for assessing commercial loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our categories include Pass, Special mention, Substandard, Doubtful, and Loss, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

The tables below provide a breakdown of outstanding commercial loans by risk category.

							June 30, 2013
(dollars in thousands)	Owner occupied RE		Non-owner occupied RE		Construction		Business		Total
Pass	$	170,124		137,625		19,836		106,249		433,834
Special mention		8,698		9,315		1,170		4,030		23,213
Substandard		2,435		14,146		1,892		6,234		24,707
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	181,257		161,086		22,898		116,513		481,754
							December 31, 2012
	Owner occupied RE		Non-owner occupied RE		Construction		Business		Total
Pass	$	148,255		141,352		18,265		105,024		412,896
Special mention		7,446		9,358		-		2,750		19,554
Substandard		3,089		14,453		2,082		6,395		26,019
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	158,790		165,163		20,347		114,169		458,469

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.

	June 30, 2013
(dollars in thousands)	Owner occupied RE		Non-owner occupied RE		Construction		Business		Total
Current	$	180,398		160,401		21,960		115,012		477,771
30-59 days past due		137		141		-		614		892
60-89 days past due		-		-		-		300		300
Greater than 90 Days		722		544		938		587		2,791
	$	181,257		161,086		22,898		116,513		481,754

							December 31, 2012
	Owner occupied RE		Non-owner occupied RE		Construction		Business		Total
Current	$	157,036		163,700		19,341		112,322		452,399
30-59 days past due		306		-		-		539		845
60-89 days past due		-		463		-		100		563
Greater than 90 Days		1,448		1,000		1,006		1,208		4,662
	$	158,790		165,163		20,347		114,169		458,469

As of June 30, 2013 and December 31, 2012, loans 30 days or more past due represented 0.77% and 1.11% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.58% and 0.94% of our total loan portfolio as of June 30, 2013 and December 31, 2012, respectively.

Consumer

We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our categories include Pass, Special mention, Substandard, Doubtful, and Loss, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

The tables below provide a breakdown of outstanding consumer loans by risk category.

							June 30, 2013
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Pass	$	93,579		79,376		14,029		11,317		198,301
Special mention		1,839		2,177		-		236		4,252
Substandard		1,754		1,310		-		111		3,175
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	97,172		82,863		14,029		11,664		205,728
							December 31, 2012
	Real estate		Home equity		Construction		Other		Total
Pass	$	83,173		73,718		13,749		8,752		179,392
Special mention		2,307		2,290		-		170		4,767
Substandard		1,079		1,887		-		355		3,321
Doubtful		-		-		-		-		-
Loss		-		-		-		-		-
	$	86,559		77,895		13,749		9,277		187,480

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.

	June 30, 2013
(dollars in thousands)	Real estate		Home equity		Construction		Other		Total
Current	$	96,217		82,495		14,029		11,646		204,387
30-59 days past due		44		5		-		10		59
60-89 days past due		854		-		-		8		862
Greater than 90 Days		57		363		-		-		420
	$	97,172		82,863		14,029		11,664		205,728

							December 31, 2012
	Real estate		Home equity		Construction		Other		Total
Current	$	85,999		77,430		13,749		9,233		186,411
30-59 days past due		560		100		-		-		660
60-89 days past due		-		-		-		44		44
Greater than 90 Days		-		365		-		-		365
	$	86,559		77,895		13,749		9,277		187,480

As of June 30, 2013 and December 31, 2012, consumer loans 30 days or more past due were 0.19% and 0.17%, respectively, of total loans.

Nonperforming assets

Following is a summary of our nonperforming assets, including nonaccruing TDRs.

(dollars in thousands)	June 30, 2013			December 31, 2012
Commercial loans
Owner occupied RE	$	292			155
Non-owner occupied RE		568			1,255
Construction		938			1,006
Business		490			202
Consumer loans
Real estate		171			119
Home equity		491			577
Construction		-			-
Other		-			44
Nonaccruing troubled debt restructurings		2,594			4,809
Total nonaccrual loans, including nonaccruing TDRs		5,544			8,167
Other real estate owned		1,310			1,719
Total nonperforming assets	$	6,854			9,886
Nonperforming assets as a percentage of:
Total assets		0.82	%		1.24	%
Gross loans		1.00	%		1.53	%
Total loans over 90 days past due	$	3,211			5,027
Loans over 90 days past due and still accruing		-			-
Accruing troubled debt restructurings		9,833			9,421

Impaired Loans

The table below summarizes key information for impaired loans. Our impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.

			June 30, 2013
			Recorded investment
					Impaired loans
	Unpaid				with related		Related
	Principal		Impaired		allowance for		allowance for
(dollars in thousands)	Balance		loans		loan losses		loan losses
Commercial
Owner occupied RE	$	1,267		1,267		975		262
Non-owner occupied RE		6,093		5,583		1,878		577
Construction		4,634		1,892		1,822		181
Business		5,471		4,660		3,434		1,938
Total commercial		17,465		13,402		8,109		2,958
Consumer
Real estate		1,070		1,070		636		204
Home equity		683		683		312		261
Construction		-		-		-		-
Other		222		222		194		44
Total consumer		1,975		1,975		1,142		509
Total	$	19,440		15,377		9,251		3,590

			December 31, 2012
			Recorded investment
					Impaired loans
	Unpaid				with related		Related
	Principal		Impaired		allowance for		allowance for
	Balance		loans		loan losses		loan losses
Commercial
Owner occupied RE	$	3,071		2,271		2,116		398
Non-owner occupied RE		7,497		7,162		2,218		831
Construction		4,824		2,082		1,075		213
Business		4,048		4,048		3,329		2,092
Total commercial		19,440		15,563		8,738		3,534
Consumer
Real estate		985		985		162		24
Home equity		770		770		605		91
Construction		-		-		-		-
Other		270		270		-		-
Total consumer		2,025		2,025		767		115
Total	$	21,465		17,588		9,505		3,649

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.

	Three months ended June 30, 2013				Three months ended June 30, 2012
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,191		4		4,330		2
Non-owner occupied RE		5,715		78		5,563		77
Construction		1,987		16		2,201		18
Business		4,473		57		3,664		9
Total commercial		13,366		155		15,758		106
Consumer
Real estate		1,026		36		1,307		10
Home equity		726		3		524		2
Construction		-		-		-		-
Other		223		2		232		3
Total consumer		1,975		41		2,063		15
Total	$	15,341		196		17,821		121

	Six months ended June 30, 2013				Six months ended June 30, 2012				Year ended December 31, 2012
(dollars in thousands)	Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income		Average recorded investment		Recognized interest income
Commercial
Owner occupied RE	$	1,551		7		4,577		76		3,881		17
Non-owner occupied RE		6,198		145		4,921		179		5,811		392
Construction		2,018		26		2,157		41		2,127		66
Business		4,331		86		3,977		16		3,880		84
Total commercial		14,098		264		15,632		312		15,699		559
Consumer
Real estate		239		43		1,436		21		1,397		44
Home equity		1,012		5		478		5		518		12
Construction		-		-		-		-		-		-
Other		741		4		232		6		240		14
Total consumer		1,992		52		2,146		32		2,155		70
Total	$	16,090		316		17,778		344		17,854		629

Allowance for Loan Losses

The allowance for loan loss is management's estimate of credit losses inherent in the loan portfolio. 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. Subsequent recoveries, if any, are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

During the first quarter of 2013, management implemented a new allowance model to measure the estimated credit losses inherent in the loan portfolio.  As a result, management has adjusted the historical loss period for the Commercial and Consumer  portfolio segments to 12 quarters.  Also, included in the general component of the allowance for loan losses for both portfolio segments is a margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating general losses in the portfolio.  The new model's qualitative factors that measure the margin of imprecision have been updated to reflect the current lending environment. Lastly, the Consumer portfolio segment reserve now also includes an amount for the estimated impairment on nonaccrual consumer loans.

The following table summarizes the activity related to our allowance for loan losses:

		Six months ended June 30,
(dollars in thousands)		2013		2012
Balance, beginning of period	$	9,091		8,925
Provision for loan losses		1,875		2,475
Loan charge-offs:
Commercial
Owner occupied RE		(386	)	(892	)
Non-owner occupied RE		(172	)	(232	)
Construction		-		-
Business		(862	)	(981	)
Total commercial		(1,420	)	(2,105	)
Consumer
Real estate		-		(175	)
Home equity		(38	)	(7	)
Construction		-		-
Other		(46	)	-
Total consumer		(84	)	(182	)
Total loan charge-offs		(1,504	)	(2,287	)
Loan recoveries:
Commercial
Owner occupied RE		2		4
Non-owner occupied RE		-		-
Construction		-		9
Business		90		-
Total commercial		92		13
Consumer
Real estate		-		-
Home equity		7		-
Construction		-		-
Other		-		5
Total consumer		7		5
Total recoveries		99		18
Net loan charge-offs		(1,405	)	(2,269	)
Balance, end of period	$	9,561		9,131
Net charge-offs to average loans (annualized)		0.43	%	0.75	%
Allowance for loan losses to gross loans		1.39	%	1.48	%
Allowance for loan losses to nonperforming loans		172.48	%	88.07	%

The following tables summarize the activity in the allowance for loan losses by our commercial and consumer portfolio segments.

	Six months June 30, 2013
(dollars in thousands)	Commercial			Consumer			Total
Balance, beginning of period	$	7,981			1,110			9,091
Provision		1,332			543			1,875
Loan charge-offs		(1,420	)		(84	)		(1,504	)
Loan recoveries		92			7			99
Net loan charge-offs		(1,328	)		(77	)		(1,405	)
Balance, end of period	$	7,985			1,576			9,561

				Year ended December 31, 2012
		Commercial		Consumer		Total
Balance, beginning of period	$	8,061		864		8,925
Provision		3,447		1,103		4,550
Loan charge-offs		(3,600	)	(905	)	(4,505		)
Loan recoveries		73		48		121
Net loan charge-offs		(3,527	)	(857	)	(4,384		)
Balance, end of period	$	7,981		1,110			9,091

The following table disaggregates our allowance for loan losses and recorded investment in loans by impairment methodology.

									June 30, 2013
	Allowance for loan losses						Recorded investment in loans
(dollars in thousands)	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	2,958		509		3,467		13,402		1,975		15,377
Collectively evaluated		5,027		1,067		6,094		468,352		203,753		672,105
Total	$	7,985		1,576		9,561		481,754		205,728		687,482
									December 31, 2012
	Allowance for loan losses						Recorded investment in loans
	Commercial		Consumer		Total		Commercial		Consumer		Total
Individually evaluated	$	3,534		-		3,534		15,563		-		15,563
Collectively evaluated		4,447		1,110		5,557		442,906		187,480		630,386
Total	$	7,981		1,110		9,091		458,469		187,480		645,949