Note 4 – Allowance for Loan Losses

The changes in the allowance for loan losses for the years ended December 31, 2012 and 2011 are as follows:



	2012		2011

Allowance for loan losses:	(In Thousands)
Balance, beginning	$	4,215	$	3,709
Provision for loan losses		1,183		734
Loans charged off		(270)		(250)
Recoveries		19		22
Balance at end of year	$	5,147	$	4,215

The following table presents the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention (potential weaknesses), substandard (well defined weaknesses) and doubtful (full collection unlikely) within the Company's internal risk rating system as of December 31, 2012 and December 31, 2011, respectively:



	Pass		Special Mention		Substandard		Doubtful		Total

December 31, 2012		(In Thousands)

Commercial real estate	$	197,879	$	748	$	6,277	$	-	$	204,904
Commercial construction		16,102		341		3,274		-		19,717
Commercial		28,066		530		100		-		28,696
Residential real estate		249,737		156		660		301		250,854
Consumer		1,382		-		-		-		1,382
Total	$	493,166	$	1,775	$	10,311	$	301	$	505,553

December 31, 2011

Commercial real estate	$	163,828	$	865	$	7,099	$	-	$	171,792
Commercial construction		9,090		-		4,324		-		13,414
Commercial		26,612		194		73		-		26,879
Residential real estate		209,810		282		269		-		210,361
Consumer		1,140		-		-		-		1,140
Total	$	410,480	$	1,341	$	11,765	$	-	$	423,586

Note 4 – Allowance for Loan Losses (Continued)

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2012 and 2011, respectively:




December 31, 2012	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized

		(In Thousands)
With no related allowance recorded:
Commercial real estate	$	5,985	$	5,985			$	6,031	$	301
Commercial construction		2,117		2,117				3,218		77
Commercial		291		291				302		7
Residential real estate		458		458				377		23
Consumer		-		-				-		-

With an allowance recorded:
Commercial real estate	$	1,635	$	1,635	$	411	$	1,899	$	161
Commercial construction		1,498		1,498		198		749		44
Commercial		11		60		11		5		-
Residential real estate		660		660		130		689		18
Consumer		-		-		-		-		-

Total:
Commercial real estate	$	7,620	$	7,620	$	411	$	7,930	$	462
Commercial construction		3,615		3,615		198		3,967		121
Commercial		302		351		11		307		7
Residential real estate		1,118		1,118		130		1,066		41
Consumer		-		-		-		-		-
	$	12,655	$	12,704	$	750	$	13,270	$	631


December 31, 2011

With no related allowance recorded:
Commercial real estate	$	7,814	$	7,863			$	5,787	$	492
Commercial construction		3,974		3,974				3,360		156
Commercial		362		362				363		15
Residential real estate		552		552				498		24
Consumer		-		-				-		-

With an allowance recorded:
Commercial real estate	$	670	$	670	$	107	$	463	$	42
Commercial construction		-		-		-		-		-
Commercial		55		55		19		61		4
Residential real estate		-		-		-		-		-
Consumer		-		-		-		-		-

Total:
Commercial real estate	$	8,484	$	8,533	$	107	$	6,250	$	534
Commercial construction		3,974		3,974		-		3,360		156
Commercial		417		417		19		424		19
Residential real estate		552		552		-		498		24
Consumer		-		-		-		-		-
	$	13,427	$	13,476	$	126	$	10,532	$	733

Note 4 – Allowance for Loan Losses (Continued)

The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2012 and 2011, respectively:



	December 31, 2012		December 31, 2011

	(In Thousands)

Commercial real estate	$	2,104	$	1,869
Commercial construction		-		-
Commercial		39		-
Residential real estate		301		-
Consumer		-		-
Total	$	2,444	$	1,869

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2012 and 2011, respectively:



December 31, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loan Receivables		Loan Receivables > 90 Days and Accruing

		(In Thousands)
Commercial real estate	$	831	$	-	$	1,809	$	2,640	$	202,264	$	204,904	$	351
Commercial construction		2,559		-		-		2,559		17,158		19,717		-
Commercial		-		39		10		49		28,647		28,696		10
Residential real estate		301		-		301		602		250,252		250,854		-
Consumer		13		-		-		13		1,369		1,382		-
Total	$	3,704	$	39	$	2,120	$	5,863	$	499,690	$	505,553	$	361

December 31, 2011

Commercial real estate	$	300	$	1,222	$	2,074	$	3,596	$	168,196	$	171,792	$	205
Commercial construction		-		1,412		-		1,412		12,002		13,414		-
Commercial		-		-		61		61		26,818		26,879		61
Residential real estate		-		269		-		269		210,092		210,361		-
Consumer		22		-		-		22		1,118		1,140		-
Total	$	322	$	2,903	$	2,135	$	5,360	$	418,226	$	423,586	$	266

Note 4 – Allowance for Loan Losses (Continued)

The following table summarizes information in regards to the allowance for loan losses and the recorded investment in loans receivable at December 31, 2012, and the activity in the allowance for loan losses for the year ended December 31, 2011:



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

Allowance for credit losses		(In Thousands)

Year Ending December 31, 2012
Beginning Balance - December 31, 2011	$	1,264	$	352	$	423	$	1,691	$	40	$	445	$	4,215
Charge-offs		(231)		-		-		(39)		-		-		(270)
Recoveries		1		-		-		18		-		-		19
Provisions		973		308		(29)		7		(7)		(69)		1,183
Ending Balance - December 31, 2012	$	2,007	$	660	$	394	$	1,677	$	33	$	376	$	5,147

Year Ending December 31, 2011
Beginning Balance - December 31, 2010	$	1,014	$	443	$	325	$	1,309	$	35	$	583	$	3,709
Charge-offs		(137)		-		(50)		(63)		-		-		(250)
Recoveries		2		-		4		4		12		-		22
Provisions		385		(91)		144		441		(7)		(138)		734
Ending Balance - December 31, 2011	$	1,264	$	352	$	423	$	1,691	$	40	$	445	$	4,215

Note 4 – Allowance for Loan Losses (Continued)

The following tables represent the allocation of the allocation for loan losses and the related loan portfolio disaggregated based on impairment methodology at December 31, 2012 and December 31, 2011.



	Commercial Real Estate		Commercial Construction		Commercial		Residential Real Estate		Consumer		Unallocated		Total

	(In Thousands)
December 31, 2012
Allowance for Loan Losses
Ending Balance	$	2,007	$	660	$	394	$	1,677	$	33	$	376	$	5,147
Ending balance: individually evaluated for impairment	$	411	$	198	$	11	$	130	$	-	$	-	$	750
Ending balance: collectively evaluated for impairment	$	1,596	$	462	$	383	$	1,547	$	33	$	376	$	4,397

Loans receivables:
Ending balance	$	204,904	$	19,717	$	28,696	$	250,854	$	1,382			$	505,553
Ending balance: individually evaluated for impairment	$	7,620	$	3,615	$	302	$	1,118	$	-			$	12,655
Ending balance: collectively evaluated for impairment	$	197,284	$	16,102	$	28,394	$	249,736	$	1,382			$	492,898


December 31, 2011
Allowance for Loan Losses
Ending Balance	$	1,264	$	352	$	423	$	1,691	$	40	$	445	$	4,215
Ending balance: individually evaluated for impairment	$	107	$	-	$	19	$	-	$	-	$	-	$	126
Ending balance: collectively evaluated for impairment	$	1,157	$	352	$	404	$	1,691	$	40	$	445	$	4,089

Loans receivables:
Ending balance	$	171,792	$	13,414	$	26,879	$	210,361	$	1,140			$	423,586
Ending balance: individually evaluated for impairment	$	8,484	$	3,974	$	417	$	552	$	-			$	13,427
Ending balance: collectively evaluated for impairment	$	163,308	$	9,440	$	26,462	$	209,809	$	1,140			$	410,159

Troubled Debt Restructurings

The Company may grant a concession or modification for economic or legal reasons related to a borrower’s financial condition than it would not otherwise consider, resulting in a modified loan which is then identified as troubled debt restructuring (“TDR”). The Company may modify loans through rate reductions, extensions to maturity, interest only payments, or payment modifications to better coincide the timing of payments due under the modified terms with the expected timing of cash flows from the borrowers’ operations. Loan modifications are intended to minimize the economic loss and to avoid foreclosure or repossession of the collateral. TDRs are considered impaired loans for purposes of calculating the Company’s allowance for loan losses.

The Company identifies loans for potential restructure primarily through direct communication with the borrower and the evaluation of the borrower’s financial statements, revenue projections, tax returns, and credit reports. Even if the borrower is not presently in default, management will consider the likelihood that cash flow shortages, adverse economic conditions, and negative trends may result in a payment default in the near future.

Note 4 – Allowance for Loan Losses (Continued)

The following table presents newly restructured loans that occurred during the years ended December 31, 2012 and 2011:



	Number of Loans	Pre-Modification Outstanding Balance		Post- Modification Outstanding Balance


	(Dollars In Thousands)
Year Ending December 31, 2012
Commercial real estate	4	$	1,247	$	1,247
Commercial construction	1		341		341
Commercial	1		3		3
Residential real estate	1		660		660

	7	$	2,251	$	2,251
Year Ending December 31, 2011
Commercial real estate	2	$	1,920	$	1,920
Commercial construction	4		2,808		2,808
Commercial	-		-		-
Residential real estate	2		161		161

	8	$	4,889	$	4,889

Of the TDRs described above, two loans required an impairment reserve of $206 thousand recorded in the allowance for loan losses for the twelve months ended December 31, 2012 and two loans attributable to one customer relationship required an impairment reserve of $19 thousand recorded in the allowance for loan losses for the twelve months ended December 31, 2011. As of the years ended December 31, 2012 and 2011, no available commitments were outstanding on TDRs.

There were no loans that were modified and classified as a TDR within the prior twelve months that experienced a payment default (loans ninety or more days past due) during the twelve months ended December 31, 2012.

The following table represents loans that were modified and classified as a TDR within the twelve months ended December 31, 2011 that experienced a payment default (loans ninety or more days past due):



	Number of Loans		Recorded Investment

	(Dollars In Thousands)
Year ending December 31, 2011
Commercial real estate	4	$	1,309

	4	$	1,309