Note 5: Loans and Allowance for Loan Losses

Categories of loans at March 31, 2012 and December 31, 2011 include the following:


		March 31, 2012		December 31, 2011
(In thousands)
Commercial loans	$	132,283	$	130,398
Commercial real estate loans		150,702		154,109
Construction loans		49,207		48,438
Home equity loans		57,446		59,750
Residential real estate loans		40,324		37,882
Lease financing		1,910		2,268
Consumer loans		6,063		5,998

Total loans		437,935		438,843
Less: Allowance for loan losses		10,841		13,189

Net loans	$	427,094	$	425,654

The following tables present the balance in the allowance for loan losses at or for the three months ended March 31, 2012 and 2011:


							At or For the Three Months Ended March 31, 2012
					Commercial				Home		Residential			Lease
(In thousands)		Commercial			Real Estate		Construction		Equity		Real Estate			Financing				Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	2,987		$	3,772	$	2,721		$	1,338	$	2,312		$	30		$	29		$	13,189
Provision charged to expense		725			747		(206	)		55		(854	)		(15	)		(2	)		450
Losses charged off		(1,829	)		–		(876	)		–		(339	)		–			–			(3,044	)
Recoveries		75			8		125			25		12			–			1			246
Balance, end of period	$	1,958		$	4,527	$	1,764		$	1,418	$	1,131		$	15		$	28		$	10,841


							At or For the Three Months Ended March 31, 2011
					Commercial				Home			Residential			Lease
		Commercial			Real Estate		Construction		Equity			Real Estate			Financing			Consumer			Total
Allowance for loan losses:
Balance, beginning of period	$	3,339		$	3,974	$	4,579		$	1,262		$	1,488		$	38	$	51		$	14,731
Provision charged to expense		33			643		(940	)		(5	)		246			27		(4	)		–
Losses charged off		(18	)		–		(80	)		–			(183	)		–		–			(281	)
Recoveries		155			–		21			37			64			25		3			305
Balance, end of period	$	3,509		$	4,617	$	3,580		$	1,294		$	1,615		$	90	$	50		$	14,755

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 March 31, 2012 and December 31, 2011:


								March 31, 2012
				Commercial				Home		Residential		Lease
(In thousands)		Commercial		Real Estate		Construction		Equity		Real Estate		Financing		Consumer		Total
Allowance for loan losses:
Individually evaluated for
impairment	$	953	$	3,638	$	679	$	615	$	473	$	11	$	–	$	6,369
Collectively evaluated for
impairment		1,005		889		1,085		803		658		4		28		4,472
Total	$	1,958	$	4,527	$	1,764	$	1,418	$	1,131	$	15	$	28	$	10,841

Loans:
Individually evaluated for
impairment	$	21,580	$	19,137	$	15,177	$	4,855	$	5,935	$	601	$	12	$	67,297
Collectively evaluated for
impairment		110,703		131,565		34,030		52,591		34,389		1,309		6,051		370,638
Total	$	132,283	$	150,702	$	49,207	$	57,446	$	40,324	$	1,910	$	6,063	$	437,935


								December 31, 2011
				Commercial				Home	Residential			Lease
		Commercial		Real Estate		Construction		Equity	Real Estate			Financing		Consumer		Total
Allowance for loan losses:
Individually evaluated for
impairment	$	1,825	$	3,055	$	1,462	$	565	$	1,727	$	26	$	–	$	8,660
Collectively evaluated for
impairment		1,162		717		1,259		773		585		4		29		4,529
Total	$	2,987	$	3,772	$	2,721	$	1,338	$	2,312	$	30	$	29	$	13,189

Loans:
Individually evaluated for
impairment	$	24,625	$	18,099	$	16,535	$	3,836	$	6,981	$	648	$	2	$	70,726
Collectively evaluated for
impairment		105,773		136,010		31,903		55,914		30,901		1,620		5,996		368,117
Total	$	130,398	$	154,109	$	48,438	$	59,750	$	37,882	$	2,268	$	5,998	$	438,843

The following table presents the credit risk profile of the Company's loan portfolio based on the rating category and payment activity as of March 31, 2012 and December 31, 2011. These categories are defined as follows:

Pass – loans that exhibit acceptable financial performance, cash flow, leverage and 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.


				March 31, 2012				December 31, 2011
(In thousands)		Pass		Classified		Total		Pass		Classified		Total
Commercial	$	124,847	$	7,436	$	132,283	$	118,396	$	12,002	$	130,398
Commercial real estate		140,203		10,499		150,702		144,693		9,416		154,109
Construction		36,497		12,710		49,207		33,792		14,646		48,438
Home equity		53,493		3,953		57,446		56,779		2,971		59,750
Residential real estate		35,393		4,931		40,324		32,002		5,880		37,882
Lease financing		1,617		293		1,910		1,960		308		2,268
Consumer		6,052		11		6,063		5,998		–		5,998
Total	$	398,102	$	39,833	$	437,935	$	393,620	$	45,223	$	438,843

The following tables present the Company's loan portfolio aging analysis, including loans on non-accrual, as of March 31, 2012 and December 31, 2011:


						March 31, 2012
													Total
						Greater than						Total	Loans > 90
		30-59 Days		60-89 Days		90 Days	Total Past					Loans	Days &
(In thousands)		Past Due		Past Due		Past Due		Due		Current		Receivable	Accruing
Commercial	$	20	$	177	$	600	$	797	$	131,486	$	132,283	$	–
Commercial real estate		1,932		1,479		142		3,553		147,149		150,702		–
Construction		–		1,253		1,171		2,424		46,783		49,207		–
Home equity		–		–		3,155		3,155		54,291		57,446		–
Residential real estate		861		247		448		1,556		38,768		40,324		–
Lease financing		–		–		18		18		1,892		1,910		–
Consumer		–		–		–		–		6,063		6,063		–
Total	$	2,813	$	3,156	$	5,534	$	11,503	$	426,432	$	437,935	$	–


						December 31, 2011
													Total
						Greater than						Total	Loans > 90
		30-59 Days		60-89 Days		90 Days	Total Past					Loans	Days &
		Past Due		Past Due		Past Due	Due			Current		Receivable	Accruing
Commercial	$	703	$	200	$	928	$	1,831	$	128,567	$	130,398	$	–
Commercial real estate		–		–		143		143		153,966		154,109		–
Construction		1,376		–		1,781		3,157		45,281		48,438		–
Home equity		–		2,165		–		2,165		57,585		59,750		–
Residential real estate		678		717		1,367		2,762		35,120		37,882		–
Lease financing		104		–		18		122		2,146		2,268		–
Consumer		–		–		–		–		5,998		5,998		–
Total	$	2,861	$	3,082	$	4,237	$	10,180	$	428,663	$	438,843	$	–

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 due from the borrower in accordance with 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 tables present impaired loans for March 31, 2012 and December 31, 2011:


				March 31, 2012
				Unpaid
		Recorded		Principal		Specific
(In thousands)		Balance		Balance		Allowance
Loans without a specific
valuation allowance:
Commercial	$	154	$	361	$	–
Commercial real estate		2,509		3,085		–
Construction		910		1,420		–
Home equity		1,462		1,500		–
Residential real estate		826		947		–
Lease financing		–		–		–
Consumer		–		–		–

Loans with a specific
valuation allowance:
Commercial	$	1,950	$	1,969	$	471
Commercial real estate		3,955		3,955		2,837
Construction		11,571		11,580		550
Home equity		2,260		2,304		380
Residential real estate		2,922		2,947		125
Lease financing		293		294		11
Consumer		–		–		–

Total:
Commercial	$	2,104	$	2,330	$	471
Commercial real estate		6,464		7,040		2,837
Construction		12,481		13,000		550
Home equity		3,722		3,804		380
Residential real estate		3,748		3,894		125
Lease financing		293		294		11
Consumer		–		–		–
Total	$	28,812	$	30,362	$	4,374


				December 31, 2011
				Unpaid
		Recorded		Principal		Specific
(In thousands)		Balance		Balance	Allowance
Loans without a specific
valuation allowance:
Commercial	$	16	$	32	$	–
Commercial real estate		482		514		–
Construction		101		101		–
Home equity		468		500		–
Residential real estate		904		1,014		–
Lease financing		–		–		–
Consumer		–		–		–

Loans with a specific
valuation allowance
Commercial	$	3,709	$	3,850	$	1,281
Commercial real estate		4,819		5,357		2,257
Construction		14,313		14,776		1,353
Home equity		2,208		2,242		296
Residential real estate		3,838		4,416		1,389
Lease financing		307		307		25
Consumer		–		–		–

Total:
Commercial	$	3,725	$	3,882	$	1,281
Commercial real estate		5,301		5,871		2,257
Construction		14,414		14,877		1,353
Home equity		2,676		2,742		296
Residential real estate		4,742		5,430		1,389
Lease financing		307		307		25
Consumer		–		–		–
Total	$	31,165	$	33,109	$	6,601

The following table presents additional information related to impaired loans for the three months ended March 31, 2012 and 2011:


		For the three				For the three
		months ended				months ended
		March 31, 2012				March 31, 2011
		Average				Average
		Investment				Investment
		in	Interest			in		Interest
		Impaired	Income			Impaired		Income
(In thousands)		Loans	Recognized			Loans		Recognized
Loans without a specific
valuation allowance:
Commercial	$	85	$	–	$	216	$	–
Commercial real estate		1,416		87		2,458		–
Construction		303		–		2,814		–
Home equity		715		–		619		–
Residential real estate		878		–		1,277		14
Lease financing		–		–		54		35
Consumer		–		–		51		–

Loans with a specific valuation
allowance:
Commercial	$	4,218	$	32	$	5,093	$	47
Commercial real estate		4,174		50		9,548		28
Construction		13,369		116		21,856		95
Home equity		2,468		–		745		–
Residential real estate		3,154		35		4,289		37
Lease financing		300		4		350		7
Consumer		–		–		–		–

Total:
Commercial	$	4,303	$	32	$	5,309	$	47
Commercial real estate		5,590		137		12,006		28
Construction		13,672		116		24,670		95
Home equity		3,183		–		1,364		–
Residential real estate		4,032		35		5,566		51
Lease financing		300		4		404		42
Consumer		–		–		51		–
Total	$	31,080	$	324	$	49,370	$	263

The following table presents the Company's non-accrual loans, also included in impaired loans, at March 31, 2012 and December 31, 2011:


		March 31, 2012		December 31, 2011
(In thousands)
Commercial	$	749	$	2,029
Commercial real estate		2,509		1,340
Construction		1,171		3,058
Home equity		3,722		2,676
Residential real estate		1,220		2,204
Lease financing		18		18
Consumer		–		–
	$	9,389	$	11,325

Included in certain loan categories in the impaired loans are loans designated as troubled debt restructurings and classified as impaired. At March 31, 2012, the Company had $1,594,000 of commercial loans, $5,222,000 of commercial real estate loans, $12,350,000 of construction loans, $2,664,000 of residential real estate loans and $276,000 of lease financing loans that were modified in troubled debt restructurings and classified as impaired. At December 31, 2011, the Company had $2,565,000 of commercial loans, $5,233,000 of commercial real estate loans, $13,659,000 of construction loans, $3,271,000 of residential real estate loans and $290,000 of lease financing loans that were modified in troubled debt restructurings and classified as impaired

The modification of terms for loans restructured and classified as troubled debt restructurings and impaired during the three month period ended March 31, 2012 and for the year ended December 31, 2011, were primarily the renewals of existing debt to troubled borrowers at a below market rate, debt restructurings to interest-only terms and debt restructurings extending the amortization period.

The following table presents loans restructured and classified as troubled debt restructurings during the three months ended March 31, 2012 and during the year ended December 31, 2011:


			March 31, 2012					December 31, 2011
			Pre-		Post-			Pre-		Post-
			Modification		Modification			Modification		Modification
			Outstanding		Outstanding			Outstanding		Outstanding
	Number		Recorded		Recorded	Number		Recorded		Recorded
(In thousands)	of Loans		Balance		Balance	of Loans		Balance		Balance
Commercial	–	$	–	$	–	6	$	1,417	$	1,408
Commercial real estate	–		–		–	5		3,498		3,498
Construction	–		–		–	3		3,724		3,724
Home equity	–		–		–	–		–		–
Residential real estate	1		136		136	–		–		–
Lease financing	–		–		–	–		–		–
Consumer	–		–		–	–		–		–
Total	1	$	136	$	136	14	$	8,639	$	8,630

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 March 31, 2012:


	March 31, 2012
	Number
(In thousands)	of Loans	Recorded Balance
Commercial	3	$	238
Commercial real estate	2		1,114
Construction	1		261
Home equity	–		–
Residential real estate	1		136
Lease financing	–		–
Consumer	–		–
Total	7	$	1,749

As of March 31, 2012, the Company had $9,000 of commitments outstanding to borrowers with loans classified as troubled debt restructurings. However, these commitments are subject to approval prior to advancement of funds to the borrower.