Note 5: Loans and Allowance for Loan Losses

Categories of loans at June 30, 2011 and December 31, 2010 include the following:

	June 30, 2011	December 31, 2010
(In thousands)
Commercial loans	$ 135,959	$ 144,181
Commercial real estate loans	162,657	169,253
Construction loans	47,656	64,641
Home equity loans	61,180	64,289
Residential real estate loans	38,933	36,903
Lease financing	3,556	5,530
Consumer loans	7,533	7,657

Total loans	457,474	492,454
Less: Allowance for loan losses	13,596	14,731

Net loans	$ 443,878	$ 477,723

The following tables present the balance in the allowance for loan losses at or for the three and six months ended June 30, 2011 and 2010:

		At or For the Three Months Ended June 30, 2011
(In thousands)	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Allowance for loan losses:
Balance, beginning of period	$ 3,509		$ 4,617	$ 3,580	$ 1,294	$ 1,615	$ 90	$ 50	$ 14,755
Provision charged to expense	(387)		1,049	1,364	37	(26)	(30)	(7)	2,000
Losses charged off	(477)		(1,000)	(1,280)	(234)	(223)	–	–	(3,214)
Recoveries	9		–	21	3	20	–	2	55
Balance, end of period	$ 2,654		$ 4,666	$ 3,685	$ 1,100	$ 1,386	$ 60	$ 45	$ 13,596

	At or For the Three Months Ended June 30, 2010
	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Allowance for loan losses:
Balance, beginning of period	$ 3,078		$ 8,287	$ 4,265	$ 1,517	$ 1,715	$ 212	$ 137	$ 19,211
Provision charged to expense	70		(642)	1,967	(3)	(93)	(69)	(30)	1,200
Losses charged off	(11)		(256)	(1,557)	(25)	(41)	–	–	(1,890)
Recoveries	113		10	35	2	3	6	–	169
Balance, end of period	$ 3,250		$ 7,399	$ 4,710	$ 1,491	$ 1,584	$ 149	$ 107	$ 18,690


		At or For the Six Months Ended June 30, 2011
	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Allowance for loan losses:
Balance, beginning of year	$ 3,339		$ 3,974	$ 4,579	$ 1,262	$ 1,488	$ 38	$ 51	$ 14,731
Provision charged to expense	(354)		1,692	424	32	220	(3)	(11)	2,000
Losses charged off	(495)		(1,000)	(1,360)	(234)	(406)	–	–	(3,495)
Recoveries	164		–	42	40	84	25	5	360
Balance, end of period	$ 2,654		$ 4,666	$ 3,685	$ 1,100	$ 1,386	$ 60	$ 45	$ 13,596

	At or For the Six Months Ended June 30, 2010
Allowance for loan losses:	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Balance, beginning of year	$ 3,630		$ 7,253	$ 5,929	$ 1,061	$ 1,737	$ 238	$ 152	$ 20,000
Provision charged to expense	(459)		392	1,155	553	(37)	(95)	(59)	1,450
Losses charged off	(145)		(256)	(2,410)	(125)	(121)	(6)	–	(3,063)
Recoveries	224		10	36	2	5	12	14	303
Balance, end of period	$ 3,250		$ 7,399	$ 4,710	$ 1,491	$ 1,584	$ 149	$ 107	$ 18,690

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment methods as of June 30, 2011 and December 31, 2010:

		June 30, 2011
(In thousands)	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Allowance for loan losses:
Individually evaluated for impairment	$ 1,336		$ 2,890	$ 2,882	$ 483	$ 632	$ 50	$ –	$ 8,273
Collectively evaluated for impairment	1,318		1,776	803	617	754	10	45	5,323
Total	$ 2,654		$ 4,666	$ 3,685	$ 1,100	$ 1,386	$ 60	$ 45	$ 13,596

Loans:
Individually evaluated for impairment	$ 24,812		$ 22,984	$ 22,142	$ 2,593	$ 5,403	$ 774	$ 58	$ 78,766
Collectively evaluated for impairment	111,147		139,673	25,514	58,587	33,530	2,782	7,475	378,708
Total	$ 135,959		$ 162,657	$ 47,656	$ 61,180	$ 38,933	$ 3,556	$ 7,533	$ 457,474


		December 31, 2010
	Commercial		Commercial Real Estate	Construction	Home Equity	Residential Real Estate	Lease Financing	Consumer	Total
Allowance for loan losses:
Individually evaluated for impairment	$ 1,832		$ 2,617	$ 3,647	$ 576	$ 912	$ 5	$ 2	$ 9,591
Collectively evaluated for impairment	1,507		1,357	932	686	576	33	49	5,140
Total	$ 3,339		$ 3,974	$ 4,579	$ 1,262	$ 1,488	$ 38	$ 51	$ 14,731

Loans:
Individually evaluated for impairment	$ 26,444		$ 26,704	$ 35,521	$ 3,544	$ 8,691	$ 983	$ 64	$ 101,951
Collectively evaluated for impairment	117,737		142,549	29,120	60,745	28,212	4,547	7,593	390,503
Total	$ 144,181		$ 169,253	$ 64,641	$ 64,289	$ 36,903	$ 5,530	$ 7,657	$ 492,454

The following table presents the credit risk profile of the Company's loan portfolio based on the rating category and payment activity as of June 30, 2011 and December 31, 2010. These categories are defined as follows:

Pass – loans that exhibit acceptable financial performance cash flow, leverage and where the probability of default is considered low.

Classified – loans are inadequately protected by the current payment capacity of the obligor or by the collateral pledged. These loans are characterized by the distinct probability that the Company will sustain some loss or added expenses if the deficiencies are not corrected.

	June 30, 2011			December 31, 2010
(In thousands)	Pass	Classified	Total	Pass	Classified	Total
Commercial	$ 124,159	$ 11,800	$ 135,959	$ 133,603	$ 10,578	$ 144,181
Commercial real estate	144,240	18,417	162,657	148,892	20,361	169,253
Construction	28,695	18,961	47,656	35,896	28,745	64,641
Home equity	59,120	2,060	61,180	61,442	2,847	64,289
Residential real estate	35,884	3,049	38,933	30,115	6,788	36,903
Lease financing	3,196	360	3,556	5,048	482	5,530
Consumer	7,482	51	7,533	7,605	52	7,657
Total	$ 402,776	$ 54,698	$ 457,474	$ 422,601	$ 69,853	$ 492,454

The following table presents the Company's loan portfolio aging analysis as of June 30, 2011 and December 31, 2010:

	June 30, 2011
(In thousands)	30-59 Days Past Due	60-89 Days Past Due	Greater than 90 Days Past Due	Total Past Due	Current	Total Loans Receivable	Total Loans > 90 Days & Accruing
Commercial	$ 283	$ 118	$ 299	$ 700	$ 135,259	$ 135,959	$ –
Commercial real estate	144	–	1,113	1,257	161,400	162,657	–
Construction	20	1,069	–	1,089	46,567	47,656	–
Home equity	291	–	157	448	60,732	61,180	–
Residential real estate	388	923	1,488	2,799	36,134	38,933	–
Lease financing	113	–	–	113	3,443	3,556	–
Consumer	–	–	51	51	7,482	7,533	–
Total	$ 1,239	$ 2,110	$ 3,108	$ 6,457	$ 451,017	$ 457,474	$ –

	December 31, 2010
	30-59 Days Past Due	60-89 Days Past Due	Greater than 90 Days Past Due	Total Past Due	Current	Total Loans Receivable	Total Loans > 90 Days & Accruing
Commercial	$ 241	$ 307	$ 2,648	$ 3,196	$ 140,985	$ 144,181	$ –
Commercial real estate	–	–	1,247	1,247	168,006	169,253	–
Construction	46	–	7,936	7,982	56,659	64,641	–
Home equity	200	–	964	1,164	63,125	64,289	–
Residential real estate	265	322	3,741	4,328	32,575	36,903	–
Lease financing	20	51	114	185	5,345	5,530	–
Consumer	4	–	–	4	7,653	7,657	–
Total	$ 776	$ 680	$ 16,650	$ 18,106	$ 474,348	$ 492,454	$ –

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect the scheduled payments of principal and interest when due according to the contractual terms of the loan agreement. Impaired loans include non-performing loans but also 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, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following table presents impaired loans for June 30, 2011 and December 31, 2010:

	June 30, 2011
(In thousands)	Recorded Balance	Unpaid Principal Balance	Specific Allowance
Loans without a specific valuation allowance:
Commercial	$ 336	$ 863	$ –
Commercial real estate	1,978	2,546	–
Construction	557	557	–
Home equity	483	500	–
Residential real estate	1,294	1,965	–
Lease financing	19	49	–
Consumer	51	54	–

Loans with a specific valuation allowance:
Commercial	$ 3,477	$ 3,564	$ 723
Commercial real estate	5,340	5,383	1,395
Construction	15,452	15,457	2,234
Home equity	719	751	149
Residential real estate	1,838	2,420	205
Lease financing	316	316	46
Consumer	–	–	–

Total:
Commercial	$ 3,813	$ 4,427	$ 723
Commercial real estate	$ 7,318	$ 7,929	$ 1,395
Construction	$ 16,009	$ 16,014	$ 2,234
Home equity	$ 1,202	$ 1,251	$ 149
Residential real estate	$ 3,132	$ 4,385	$ 205
Lease financing	$ 335	$ 365	$ 46
Consumer	$ 51	$ 54	$ –
Total	$ 31,860	$ 34,425	$ 4,752

	December 31, 2010
(In thousands)	Recorded Balance	Unpaid Principal Balance	Specific Allowance
Loans without a specific valuation allowance:
Commercial	$ 220	$ 315	$ –
Commercial real estate	4,080	4,700	–
Construction	3,203	3,203	–
Home equity	585	587	–
Residential real estate	1,279	1,924	–
Lease financing	140	256	–
Consumer	52	54	–

Loans with a specific valuation allowance
Commercial	$ 5,541	$ 5,585	$ 1,133
Commercial real estate	8,022	8,092	1,110
Construction	22,318	22,430	3,039
Home equity	626	648	299
Residential real estate	4,618	5,480	577
Lease financing	402	402	3
Consumer	–	–	–

Total:
Commercial	$ 5,761	$ 5,900	$ 1,133
Commercial real estate	$ 12,102	$ 12,792	$ 1,110
Construction	$ 25,521	$ 25,633	$ 3,039
Home equity	$ 1,211	$ 1,235	$ 299
Residential real estate	$ 5,897	$ 7,404	$ 577
Lease financing	$ 542	$ 658	$ 3
Consumer	$ 52	$ 54	$ –
Total	$ 51,086	$ 53,676	$ 6,161

The December 31, 2010 information presented above was reclassified from the information presented in the 2010 Form 10K, to include troubled debt restructurings that were paying as agreed but not classified as impaired loans at December 31, 2010. This reclassification had no impact on the calculation of the allowance for loan losses.

The following table presents additional information related to impaired loans for the three and six months ended June 30, 2011:

	For the three months ended June 30, 2011			For the six months ended June 30, 2011
(In thousands)	Average Investment in Impaired Loans	Interest Income Recognized	Average Investment in Impaired Loans		Interest Income Recognized
Loans without a specific valuation allowance:
Commercial	$ 206	$ 3	$ 197		$ 3
Commercial real estate	1,653	18	1,817		18
Construction	2,454	–	2,509		–
Home equity	487	3	562		3
Residential real estate	1,190	2	1,238		16
Lease financing	23	–	40		35
Consumer	51	–	51		–

Loans with a specific valuation allowance:
Commercial	$ 4,276	$ –	$ 4,298		$ –
Commercial real estate	10,253	–	9,468		–
Construction	19,459	–	18,576		–
Home equity	843	–	784		–
Residential real estate	2,857	4	3,459		4
Lease financing	323	–	280		2
Consumer	–	–	–		–

Total:
Commercial	$ 4,482	$ 3	$ 4,495		$ 3
Commercial real estate	$ 11,906	$ 18	$ 11,285		$ 18
Construction	$ 21,913	$ –	$ 21,085		$ –
Home equity	$ 1,330	$ 3	$ 1,346		$ 3
Residential real estate	$ 4,047	$ 6	$ 4,697		$ 20
Lease financing	$ 346	$ –	$ 320		$ 37
Consumer	$ 51	$ –	$ 51		$ –
Total	$ 44,075	$ 30	$ 43,279		$ 81

The following table presents loans restructured and classified as troubled debt restructurings during the six months ended June 30, 2011 and for the twelve months ended December 31, 2010:

	June 30, 2011			December 31, 2010
(In thousands)	Number of Loans	Pre-Modification Outstanding Recorded Balance	Post-Modification Outstanding Recorded Balance	Number of Loans	Pre-Modification Outstanding Recorded Balance	Post-Modification Outstanding Recorded Balance
Commercial	2	$ 663	$ 636	3	$ 3,230	$ 2,865
Commercial real estate	2	1,153	931	2	6,339	6,418
Construction	1	3,178	3,190	8	20,638	19,932
Home equity	–	–	–	–	–	–
Residential real estate	1	550	550	2	204	204
Lease financing	1	19	19	2	596	446
Consumer	–	–	–	–	–	–
Total	7	$ 5,563	$ 5,326	17	$ 31,007	$ 29,865

The following table presents troubled debt restructurings within the previous 12 months included above that are 90 days past due or are on non-accrual as of June 30, 2011:

	June 30, 2011
(In thousands)	Number of Loans	Recorded Balance
Commercial	3	$ 681
Commercial real estate	1	858
Construction	4	2,820
Home equity	–	–
Residential real estate	2	602
Lease financing	–	–
Consumer	–	–
Total	10	$ 4,961

The Company has foreclosed on three construction loans with a balance of $7,342,000 at December 31, 2010 and one commercial real estate loan with a balance of $6,347,000 at December 31, 2010 during the period ended June 30, 2011. These loans were included in the balance of troubled debt restructurings at December 31, 2010.

As of June 30, 2011, the Company had $611,000 of commitments outstanding to borrowers with troubled debt restructuring. However, these commitments are subject to approval prior to advancement of funds to the borrower.

The following table presents the Company's non-accrual loans at June 30, 2011 and December 31, 2010:

	June 30, 2011	December 31, 2010
(In thousands)
Commercial	$ 1,739	$ 2,896
Commercial real estate	2,318	10,088
Construction	4,451	10,417
Home equity	1,202	1,211
Residential real estate	2,340	5,553
Lease financing	19	140
Consumer	51	52
	$ 12,120	$ 30,357