4. Loans, net

Information about impaired loans for the periods ended September 30, 2011 and December 31, 2010 is as follows:

	September 30,		December 31,
	2011		2010

Loans receivable for which there is a related allowance
for credit losses determined in accordance with ASC 310-10	$	1,866	$	8,611
Other impaired loans		26,247		25,001
Total impaired loans	$	28,113	$	33,612
Average monthly balance of impaired loans	$	30,862	$	32,439
Specific allowance for credit losses	$	302	$	1,788

Impaired Loans

For the Periods Ended September 30, 2011 and December 31, 2010

	Unpaid						Average
September 30, 2011	Principal		Recorded		Related		Recorded
	Balance		Investment		Allowance		Investment
	(IN THOUSANDS)
With no related allowance recorded:

Commercial
Commercial Real Estate	$	23,019	$	17,610	$	--	$	20,315
Commercial Non Real Estate		2,482		2,199		--		2,341

Consumer
Consumer - other		5,115		4,247		--		4,681
Consumer - home equity		328		315		--		321

Residential Real Estate
1-4 family		1,879		1,876		--		1,877

With an allowance recorded:

Commercial
Commercial Real Estate	$	1,557	$	1,403	$	206	$	1,480
Commercial Non Real Estate		224		224		60		224

Consumer
Consumer - other		239		239		36		239

Residential Real Estate
1-4 family		--		--		--		--

Total:	$	34,843	$	28,113	$	302	$	31,478
Commercial		27,282		21,436		266		24,360
Consumer		5,682		4,801		36		5,241
Residential		1,879		1,876		--		1,877

December 31, 2010	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment
	(IN THOUSANDS)
With no related allowance recorded:

Commercial
Commercial Real Estate	$	23,467	$	16,253	$	--	$	19,860
Commercial Non Real Estate		3,166		2,929		--		3,047

Consumer
Consumer - other		4,710		3,980		--		4,345
Consumer - home equity		162		162		--		162

Residential Real Estate
1-4 Family		1,865		1,677		--		1,771

With a related allowance recorded:

Commercial
Commercial Real Estate		8,379		8,370		1,752		8,375

Consumer
Consumer - other		241		241		36		241

Total:	$	41,990	$	33,612	$	1,788	$	37,801
Commercial		35,012		27,552		1,752		31,282
Consumer		5,113		4,383		36		4,748
Residential		1,865		1,677		--		1,771

At September 30, 2011 and December 31, 2010, loans which are accounted for on a non-accrual basis:

Loans Receivable on Non-accrual Status

As of September 30, 2011 and December 31, 2010

	September 30,		December 31,
	2011		2010
	(IN THOUSANDS)
Commercial
Commercial real estate	$	11,896	$	14,305
Commercial non real estate		1,083		1,048

Consumer
Consumer - other		1,965		1,792
Consumer - automobile		51		--
Consumer - home equity		221		147

Residential Real Estate
1-4 family		1,744		1,534
Total	$	16,960	$	18,826

Allowance for Loan Losses and Recorded Investment in Loans Receivable

For the Periods Ended September 30, 2011 and December 31, 2010

	Commercial
	Non Real			Commercial
	Estate			Real Estate			Consumer			Residential			Total
	(IN THOUSANDS)
September 30, 2011

Allowance for loan losses:

Beginning balance	$	2,166		$	4,602		$	335		$	276		$	7,379
Charge-offs		(334	)		(3,217	)		(189	)		(3	)		(3,743	)
Recoveries		35			155			27			40			257
Provisions		--			182			186			(78	)		290
Ending balance	$	1,867		$	1,722		$	359		$	235		$	4,183

Loans receivable:

Ending balance - total	$	13,206		$	101,055		$	38,954		$	13,030		$	166,245

Ending balances:
Individually evaluated
for impairment	$	2,423		$	19,013		$	4,801		$	1,876		$	28,113

Collectively evaluated
for impairment	$	10,783		$	82,042		$	34,153		$	11,154		$	138,132

December 31, 2010

Allowance for loan losses:

Beginning balance	$	1,947		$	2,773		$	502		$	357		$	5,579
Charge-offs		(976	)		(6,044	)		(1,423	)		(262	)		(8,705	)
Recoveries		118			1,203			25			69			1,415
Provisions		1,077			6,670			1,231			112			9,090
Ending balance	$	2,166		$	4,602		$	335		$	276		$	7,379

Loans receivable:

Ending balance - total	$	23,915		$	122,506		$	45,269		$	14,831		$	206,521

Ending balances:
Individually evaluated
for impairment	$	2,929		$	24,623		$	4,383		$	1,677		$	33,612

Collectively evaluated
for impairment	$	20,986		$	97,883		$	40,886		$	13,154		$	172,909

Credit Quality Indicators

As of September 30, 2011 and December 31, 2010

Credit Quality Indicators: The Corporation regularly monitors the credit quality of its loan portfolio. Credit quality refers to the current and expected ability of borrowers to repay their obligations according to the contractual terms of such loans. Credit quality is evaluated through assignment of individual loan grades, as well as past-due and performing status analysis. Credit quality indicators allow the Corporation to assess the inherent loss on certain individual and pools of loans.

Corporate Credit Exposure (1)

Credit Risk Profile by Creditworthiness Category

	Commercial
	Non Real				Commercial Real
	Estate				Estate
	September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010
	(IN THOUSANDS)
Grade 1 Superior Quality	$	54	$	4	$	--	$	--
Grade 2 Good Quality		60		340		--		--
Grade 3 Satisfactory		537		1,879		7,962		8,818
Grade 4 Acceptable		9,111		14,925		64,763		80,670
Grade 5 Special Mention		1,886		2,866		11,498		9,606
Grade 6 Substandard		1,342		3,901		16,832		23,412
Grade 7 Doubtful		216		--		--		--
Total	$	13,206	$	23,915	$	101,055	$	122,506

The Corporation uses an internal risk rating system to classify and monitor the credit quality of loans. Loan risk ratings are based on a graduated scale representing increasing likelihood of loss. Primary responsibility for the assignment of risk ratings of loans is with the individual loan officer assigned to each loan, subject of verification the Credit Administration department. Risk ratings are also reviewed periodically by an independent third party loan review firm that reports directly to the Board of Directors.

(1) Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

Consumer Credit Exposure (1)

Credit Risk Profile by Internally Assigned Grade

	Residential				Consumer
	September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010
Grade:	(IN THOUSANDS)
Pass	$	11,612	$	13,282	$	35,167	$	42,273
Special mention		--		--		--		--
Substandard		1,418		1,549		3,787		2,996
Total	$	13,030	$	14,831	$	38,954	$	45,269

(1) Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

Consumer Credit Exposure (1)

Credit Risk Profile Based on Payment Activity

	Consumer												Residential real estate
	Other				Automobile				Home equity				1-4 family
	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2011		2010		2011		2010		2011		2010		2011		2010
	(IN THOUSANDS)
Performing	$	21,257	$	25,366	$	966	$	1,502	$	14,493	$	16,462	$	11,286	$	13,297
Nonperforming		1,965		1,792		51		--		222		147		1,744		1,534
Total	$	23,222	$	27,158	$	1,017	$	1,502	$	14,715	$	16,609	$	13,030	$	14,831

(1) Credit quality indicators are reviewed and updated as applicable on an ongoing basis in accordance with credit policies.

Loans graded one through four are considered “pass” credits. As of September 30, 2011, approximately 78% of the loan portfolio were considered pass credits. For loans to qualify for these grades, they must be performing relatively close to expectations, with no significant departures from the intended source and timing of repayment.

Loans with a credit grade of five are not considered classified; however they are categorized as a special mention or watch list credit. This classification is utilized by us when we have an initial concern about the financial health of a borrower. These loans are designated as such in order to be monitored more closely than other credits in our portfolio. We then gather current financial information about the borrower and evaluate our current risk in the credit. We will then either reclassify the loan as “substandard” or back to its original risk rating after a review of the information. There are times when we may leave the loan on the watch list, if, in management’s opinion, there are risks that cannot be fully evaluated without the passage of time, and we determine to review the loan on a more regular basis. Loans on the watch list are not considered problem loans until they are determined by management to be classified as substandard. As of September 30, 2011, we had loans totaling $13.4 million rated as Special Mention.

Loans graded six or greater are considered classified credits. Loans classified as substandard are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. The loan has well-defined weaknesses that jeopardize the liquidation value and has the distinct possibility that the Corporation will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have the weaknesses of Substandard but have additional factors that make collection or liquidation in full highly questionable and improbable. At September 30, 2011, classified loans totaled $23.6 million, with all but one loan being collateralized by real estate. Classified credits are evaluated for impairment on a quarterly basis.

The following are past due loan trends for the Corporation’s loans receivable for the periods ended September 30, 2011 and December 31, 2010.

					Greater
	30 - 59 Days		60 - 89 Days		Than		Total Past				Total Loans
	Past Due		Past Due		90 Days		Due		Current		Receivable
	(IN THOUSANDS)
September 30, 2011

Commercial:
Commercial non real estate	$	124	$	753	$	692	$	1,569	$	11,637	$	13,206
Commercial real estate		244		1,865		8,532		10,641		90,414		101,055
Consumer:
Consumer - other		487		646		1,645		2,778		20,444		23,222
Consumer - automobile		53		--		--		53		964		1,017
Consumer - home equity		105		41		109		255		14,460		14,715
Residential 1-4 family		--		245		749		994		12,036		13,030
Total	$	1,013	$	3,550	$	11,727	$	16,290	$	149,955	$	166,245

December 31, 2010

Commercial:
Commercial non real estate	$	175	$	221	$	1,089	$	1,485	$	22,430	$	23,915
Commercial real estate		1,668		1,883		12,989		16,540		105,966		122,506
Consumer:
Consumer - other		718		472		886		2,076		25,082		27,158
Consumer - automobile		66		32		--		98		1,404		1,502
Consumer - home equity		148		94		14		256		16,353		16,609
Residential 1-4 family		1,060		656		1,119		2,835		11,996		14,831
Total	$	3,835	$	3,358	$	16,097	$	23,290	$	183,231	$	206,521

Troubled Debt Restructurings

As a result of adopting the amendments in ASU 2011-02, the Corporation reassessed all restructurings that occurred on or after the beginning of the fiscal year of adoption (January 1, 2011) to determine whether they are considered troubled debt restructurings (TDRs) under the amended guidance. The Corporation identified as TDRs certain loans for which the allowance for loan losses had previously been measured under a general allowance methodology. Upon identifying those loans as TDRs, the Corporation identified them as impaired under the guidance in ASC 310-10-35. The amendments in ASU 2011-02 require prospective application of the impairment measurement guidance in ASC 310-10-35 for those loans newly identified as impaired. At the end of the first interim period of adoption (September 30, 2011), the recorded investment in loans for which the allowance was previously measured under a general allowance methodology and are now impaired under ASC 310-10-35 was $983,000, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $111,000. All other restructured loans had been evaluated for impairment individually prior to modification reclassification as a TDR. The following are loan modifications for the Corporation’s loans receivable for the three and nine month periods ended September 30, 2011.

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
			Pre		Post				Pre		Post
			Modification		Modification				Modification		Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
Troubled Debt Restructurings	of New		Recorded		Recorded		of New		Recorded		Recorded
Added during current year	Contracts		Investment		Investment		Contracts		Investment		Investment
	(IN THOUSANDS)
Commercial:
Commercial non real estate		3	$	1,121	$	1,121		6	$	1,757	$	1,521
Commercial real estate		8		4,527		4,517		11		6,404		6,375
Consumer:
Consumer - other		2		387		387		4		448		448
Residential 1-4 family		1		88		87		1		88		87
Total		14	$	6,123	$	6,112		22	$	8,697	$	8,431

	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
			Post						Post
			Modification						Modification
	Number		Outstanding		Defaulted		Number		Outstanding		Defaulted
Troubled Debt Restructurings	of New		Recorded		Recorded		of New		Recorded		Recorded
Defaulted during the period	Contracts		Investment		Investment		Contracts		Investment		Investment
Added since September 30, 2010		(IN THOUSANDS)

Commercial:
Commercial non real estate		--	$	--	$	--		2	$	346	$	127
Commercial real estate		2		1,157		1,157		5		3,490		3,475
Consumer:
Consumer - other		1		14		14		3		159		159
Total		3	$	1,171	$	1,171		10	$	3,995	$	3,761

During the nine months ended September 30, 2011, the Corporation modified 22 loans that were considered to be troubled debt restructurings. We extended the terms for 12 of these loans and the interest rate was lowered for 10 of these loans. During the nine months ended September 30, 2011, 10 loans that had previously been restructured were in default, 3 of which went into default in the quarter.