Allowance for Loan Losses

9 Months Ended

Sep. 30, 2011

Notes to Financial Statements

Allowance for Loan Losses

A summary of transactions in the allowance for loan losses follows:

Nine Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,724		$	1,814		$	407		$	59		$	111		$	1,671	$	5,786
Charge-offs		(973	)		(783	)		(306	)		(60	)		(72	)		-		(2,194	)
Recoveries		56			9			27			22			38			-		152
Provision		1,244			425			172			37			24			1,198		3,100
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859
Three Months Ended September 30, 2011	Commercial			Real Estate			Home Equity			Credit Cards			Consumer			Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	1,812		$	1,784		$	381		$	57		$	435		$	2,039	$	6,508
Charge-offs		(520	)		(77	)		(250	)		(15	)		238			-		(624	)
Recoveries		24			-			-			8			28			-		60
Provision		735			(242	)		169			8			(600	)		830		900
Ending Balance	$	2,051		$	1,465		$	300		$	58		$	101		$	2,869	$	6,844
Individually evaluated for impairment (specific reserve)		309			673			3			-			-			-		985
Collectively evaluated for impairment		1,742			792			297			58			101			2,869		5,859

Nine Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	3,836
Charge-offs		-		-		-		-		-		-		(1,796	)
Recoveries		-		-		-		-		-		-		60
Provision		-		-		-		-		-		-		3,100
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610
Three Months Ended September 30, 2010*	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Beginning Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	4,890
Charge-offs		-		-		-		-		-		-		(1,010	)
Recoveries		-		-		-		-		-		-		20
Provision		-		-		-		-		-		-		1,300
Ending Balance	$	-	$	-	$	-	$	-	$	-	$	-	$	5,200
Individually evaluated for impairment (specific reserve)		-		-		-		-		-		-		590
Collectively evaluated for impairment		-		-		-		-		-		-		4,610

*Detailed table not required for September 2010 data.

Recorded Investment in Loan Receivables (in thousands)

September 30, 2011	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Loan Receivable:	$	170,675	$	210,133	$	55,943	$	2,710	$	13,297	$	-	$	452,758
Individually evaluated for impairment	$	15,880	$	27,099	$	1,002	$	-	$	67	$	-	$	44,048
Collectively evaluated for impairment	$	154,795	$	183,034	$	54,941	$	2,710	$	13,230	$	-	$	408,710

Allowance for Loan Losses and Recorded Investment in Loan Receivables (in thousands)

December 31, 2010	Commercial		Real Estate		Home Equity		Credit Cards		Consumer		Unallocated		Total
Allowance for loan losses:
Ending Balance	$	1,724	$	1,814	$	407	$	59	$	111	$	1,671	$	5,786
Ending Balance:
Individually evaluated for impairment (specific reserve)		161		1,003		118		-		1		-		1,283
Collectively evaluated for impairment		1,563		811		289		59		110		1,671		4,503
Loans Receivable:	$	153,511	$	214,906	$	54,593	$	2,771	$	19,366	$	-	$	445,147
Individually evaluated for impairment	$	12,406	$	16,806	$	1,538	$	-	$	1,099	$	-	$	31,849
Collectively evaluated for impairment	$	141,105	$	198,100	$	53,055	$	2,771	$	18,267	$	-	$	413,298

Aging of Past Due Loans Receivable (in thousands) as of September 30, 2011

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	949	$	319	$	86	$	1,354	$	6,264	$	163,058	$	170,676
Real Estate		6,892		2,261		1,715		10,868		3,892		195,373		210,133
Home Equity		660		265		328		1,253		-		54,688		55,941
Credit Cards		28		14		-		42		-		2,668		2,710
Consumer		138		61		21		220		24		13,054		13,298
Total	$	8,667	$	2,920	$	2,150	$	13,737	$	10,180	$	428,841	$	452,758

Aging of Past Due Loans Receivable (in thousands) as of December 31, 2010

	30-59 Days Past due		60-89 Days Past Due		Greater than 90 Days (excluding non-accrual)		Total Past Due		Non-Accrual Loans		Current		Total Loans Receivable
Commercial	$	756	$	382	$	4,581	$	5,719	$	1,656	$	146,137	$	153,512
Real Estate		6,303		1,395		3,021		10,719		5,189		198,998		214,906
Home Equity		1,302		595		588		2,485		715		51,392		54,592
Credit Cards		19		6		-		25		-		2,746		2,771
Consumer		1,240		67		54		1,361		30		17,975		19,366
Total	$	9,620	$	2,445	$	8,244	$	20,309	$	7,590	$	417,248	$	445,147

Credit quality indicators as of September 30, 2011

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	September 30, 2011
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	62	$	156	$	-
Grade 2 - Modest Risk		1,091		3,369		461
Grade 3 - Average Risk		23,740		16,483		7,753
Grade 4 - Acceptable Risk		90,270		85,491		38,720
Grade 5 - Marginally Acceptable		45,316		38,613		6,172
Grade 6 – Watch		18,540		9,302		1,261
Grade 7 – Substandard		31,030		17,061		1,574
Grade 8 – Doubtful		84		201		-
Total	$	210,133	$	170,676	$	55,941
Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity

	Credit Cards		Consumer
Performing	$	2,710	$	13,278
Non performing (past due 90 days or greater)		-		20
Total	$	2,710	$	13,298

See following page for description of loan grades.

Credit quality indicators as of December 31, 2010

Corporate Credit Exposure
Credit Risk Profile by Creditworthiness Category
	December 31, 2010
	Real Estate		Commercial		Home Equity
Grade 1 - Minimal Risk	$	69	$	175	$	-
Grade 2 - Modest Risk		818		1,679		575
Grade 3 - Average Risk		30,042		16,254		7,943
Grade 4 - Acceptable Risk		107,028		77,472		37,847
Grade 5 - Marginally Acceptable		40,163		40,908		5,473
Grade 6 – Watch		16,785		7,781		905
Grade 7 – Substandard		19,719		8,640		1,849
Grade 8 – Doubtful		282		603		-
Total	$	214,906	$	153,512	$	54,592

Consumer Credit Exposure
Credit Risk Profile Based on Payment Activity
	Credit Cards		Consumer
Performing	$	2,771	$	19,311
Non performing (past due 90 days or greater)		-		55
Total	$	2,771	$	19,366

Description of loan grades:

Grade 1 – Minimal Risk:   Excellent credit, superior asset quality, excellent debt capacity and coverage, and recognized management capabilities.

Grade 2 – Modest Risk:  Borrower consistently generates sufficient cash flow to fund debt service, excellent credit, above average asset quality and liquidity.

Grade 3 – Average Risk:  Borrower generates sufficient cash flow to fund debt service.  Employment (or business) is stable with good future trends.  Credit is very good.

Grade 4 – Acceptable Risk:  Borrower’s cash flow is adequate to cover debt service; however, unusual expenses or capital expenses must by covered through additional long term debt.  Employment (or business) stability is reasonable, but future trends may exhibit slight weakness. Credit history is good. No unpaid judgments or collection items appearing on credit report.

Grade 5 – Marginally acceptable:  Credit to borrowers who may exhibit declining earnings, may have leverage that is materially above industry averages, liquidity may be marginally acceptable.  Employment or business stability may be weak or deteriorating.  May be currently performing as agreed, but would be adversely affected by developing factors such as layoffs, illness, reduced hours or declining business prospects.  Credit history shows weaknesses, past dues, paid or disputed collections and judgments, but does not include borrowers that are currently past due on obligations or with unpaid, undisputed judgments.

Grade 6 – Watch:  Loans are currently protected, but are weak due to negative balance sheet or income statement trends.  There may be a lack of effective control over collateral or the existence of documentation deficiencies.  These loans have potential weaknesses that deserve management’s close attention.  Other reasons supporting this classification include adverse economic or market conditions, pending litigation or any other material weakness.  Existing loans that become 60 or more days past due are placed in this category pending a return to current status.

Grade 7 – Substandard: Loans’ having well-defined weaknesses where a payment default and or loss is possible, but not yet probable.  Cash flow is inadequate to service the debt under the current payment, or terms, with prospects that the condition is permanent.  Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the borrower and there is the likelihood that collateral will have to be liquidated and/or guarantor(s) called upon to repay the debt.  Generally, the loan is considered collectible as to both principal and interest, primarily because of collateral coverage, however, if the deficiencies are not corrected quickly; there is a probability of loss.

Grade 8 – Doubtful:  The loan has all the characteristics of a substandard credit, but available information indicates it is unlikely the loan will be repaid in its entirety.  Cash flow is insufficient to service the debt.  It may be difficult to project the exact amount of loss, but the probability of some loss is great.  Loans are to be placed on non-accrual status when any portion is classified doubtful.