4.	Loans, net

Loans receivable consisted of the following (dollars in thousands):

		June 30,			December 31,
		2012			2011
Mortgage loans:
Fixed-rate residential	$	7,301		$	8,063
Adjustable-rate residential		3,588			3,967
Commercial real estate		87,309			97,547
Construction		--			308
Total mortgage loans		98,198			109,885
Commercial non-real estate		10,392			12,939
Consumer loans:
Home equity		14,436			14,590
Consumer and installment		21,790			22,939
Consumer lines of credit		283			300
Total consumer loans		36,509			37,829
Total loans		145,099			160,653
Less:
Unamortized loan discount		(210	)		(231	)
Allowance for loan losses		(4,576	)		(4,549	)
Net deferred loan origination costs		144			146
Total, net	$	140,457		$	156,019
Weighted-average interest rate of loans		4.68	%		5.08	%

Information about impaired loans for the periods ended June 30, 2012 and December 31, 2011 is as follows (in thousands):

	June 30,		December 31,
	2012		2011

Loans receivable for which there is a related allowance for credit losses determined in accordance with ASC 310-10/Statement No. 114	$	1,636	$	1,923
Other impaired loans		26,751		25,550
Total impaired loans	$	28,387	$	27,473
Average monthly balance of impaired loans	$	32,602	$	29,916
Specific allowance for credit losses	$	692	$	439

Impaired Loans
For the Periods Ended June 30, 2012 and December 31, 2011
(in thousands)

	Unpaid						Average
June 30, 2012	Principal		Recorded		Related		Recorded
	Balance		Investment		Allowance		Investment

With no related allowance recorded:

Commercial
Commercial Real Estate	$	20,113	$	16,712	$	--	$	18,412
Commercial Non Real Estate		2,727		2,408		--		2,568

Consumer
Consumer - other		6,163		5,192		--		5,678
Consumer - home equity		517		490		--		504

Residential Real Estate
1-4 family		2,020		1,949		--		1,984

With an allowance recorded:

Commercial
Commercial Real Estate	$	1,564	$	1,403	$	619	$	1,483

Consumer
Consumer - other		233		233		73		233

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

Total:	$	33,337	$	28,387	$	692	$	30,862
Commercial		24,404		20,523		619		22,463
Consumer		6,913		5,915		73		6,415
Residential		2,020		1,949		--		1,984

December 31, 2011	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment

With no related allowance recorded:

Commercial
Commercial Real Estate	$	22,454	$	16,949	$	--	$	19,702
Commercial Non Real Estate		2,376		2,075		--		2,225

Consumer
Consumer - other		5,135		4,203		--		4,669
Consumer - home equity		511		491		--		501

Residential Real Estate
1-4 Family		1,891		1,832		--		1,862

With a related allowance recorded:

Commercial
Commercial Real Estate	$	1,564	$	1,403	$	306	$	1,483
Commercial Non Real Estate		282		281		60		282

Consumer
Consumer - other		239		239		73		239

Total:	$	34,452	$	27,473	$	439	$	30,963
Commercial		26,676		20,708		366		23,692
Consumer		5,885		4,933		73		5,409
Residential		1,891		1,832		--		1,862

At June 30, 2012 and December 31, 2011, loans which are accounted for on a non-accrual basis:

Loans Receivable on Non-accrual Status
As of June 30, 2012 and December 31, 2011
(in thousands)

	June 30,		December 31,
	2012		2011
Commercial
Commercial real estate	$	11,434	$	11,338
Commercial non real estate		1,351		1,340

Consumer
Consumer - other		2,872		2,536
Consumer - automobile		39		65
Consumer - home equity		356		307

Residential Real Estate
1-4 family		1,171		1,220
Total	$	17,223	$	16,806

Allowance for Loan Losses and Recorded Investment in Loans Receivable
(in thousands)

The following tables present the activity in the allowance for loan losses by portfolio segment as of June 30, 2012 and 2011.

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total

June 30, 2012

Allowance for loan losses:

Beginning balance	$	1,887		$	1,920		$	484		$	258		$	4,549
Charge-offs		(48	)		(299	)		(286	)		(6	)		(639	)
Recoveries		3			28			4			1			36
Provisions		185			383			54			8			630
Ending balance	$	2,027		$	2,032		$	256		$	261		$	4,576

June 30, 2011

Allowance for loan losses:

Beginning balance	$	2,166		$	4,602		$	335		$	276		$	7,379
Charge-offs		(295	)		(777	)		(181	)		(11	)		(1,264	)
Recoveries		33			138			25			61			257
Provisions		--			--			--			--			--
Ending balance	$	1,904		$	3,963		$	179		$	326		$	6,372

The following tables present the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of June 30, 2012 and December 31, 2111.

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total

Allowance for loan losses:

June 30, 2012

Ending balances attributable
to loans:
Individually evaluated
for impairment	$	--	$	619	$	73	$	-- $		692

Collectively evaluated
for impairment		2,027		1,413		183		261		3,884

Ending balance	$	2,027	$	2,032	$	256	$	261	$	4,576

Loans receivable:

Ending balance - total	$	10,392	$	87,309	$	36,509	$	10,889	$	145,099

Ending balances:
Individually evaluated
for impairment	$	2,408	$	18,115	$	5,915	$	1,949	$	28,387

Collectively evaluated
for impairment	$	7,984	$	69,194	$	30,594	$	8,940	$	116,712

			Commercial
	Commercial		Real Estate		Consumer		Residential		Total


Allowance for loan losses:

December 31, 2011

Ending balances attributable
to loans:
Individually evaluated
for impairment	$	60	$	306	$	73	$	--	$	439

Collectively evaluated
for impairment		1,827		1,614		411		258		4,110

Ending balance	$	1,887	$	1,920	$	484	$	258	$	4,549

Loans receivable:

Ending balance - total	$	12,939	$	97,547	$	37,829	$	12,338	$	160,653

Ending balances:
Individually evaluated
for impairment	$	2,356	$	18,352	$	4,933	$	1,832	$	27,473

Collectively evaluated
for impairment	$	10,583	$	79,195	$	32,896	$	10,506	$	133,180

Credit Quality Indicators

As of June 30, 2012 and December 31, 2011

(in thousands)

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.

Commercial Credit Exposure (1)

Credit Risk Profile by Creditworthiness Category

	Commercial Non Real				Commercial Real
	Estate				Estate
	June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011
Grade 1 Minimal Risk	$	58	$	52	$	--	$	--
Grade 2 Low Risk		--		223		--		--
Grade 3 Moderate Risk		263		363		7,572		9,242
Grade 4 Acceptable Risk		4,952		6,458		32,639		39,168
Grade 5 Watch		1,762		1,778		21,683		21,263
Grade 6 Special Mention		1,790		1,933		8,227		9,890
Grade 7 Substandard		1,471		1,926		15,938		17,984
Grade 8 Doubtful		96		206		1,250		--
Total	$	10,392	$	12,939	$	87,309	$	97,547

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

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 by 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.

Consumer Credit Exposure (1)

Credit Risk Profile by Internally Assigned Grade

	Residential				Consumer
	June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011
Grade:
Pass	$	8,920	$	10,833	$	31,021	$	33,307
Special mention		697		243		1,579		480
Substandard		1,272		1,262		3,909		4,042
Total	$	10,889	$	12,338	$	36,509 $		37,829

(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
	June 30,		December 31,		June 30,		December 31,		June 30,		December 31,		June 30,		December 31,
	2012		2011		2012		2011		2012		2011		2012		2011

Performing	$	18,380	$	19,760	$	782	$	878	$	14,080	$	14,282	$	9,718	$	11,118
Nonperforming		2,872		2,536		39		65		356		308		1,171		1,220
Total	$	21,252	$	22,296	$	821	$	943	$	14,436	$	14,590	$	10,889	$	12,338

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

Loans graded one through five are considered “pass” credits. As of June 30, 2012, approximately 75% 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 six 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 June 30, 2012, we had loans totaling $12.3 million rated as Special Mention.

Loans graded seven 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 June 30, 2012, classified loans totaled $23.9 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 loans for the Corporation’s loans receivable for the periods ended June 30, 2012 and December 31, 2011(in thousands).

					Greater				90 days
	30 - 59 Days		60 - 89 Days		Than		Total Past		Past Due				Total Loans
	Past Due		Past Due		90 Days		Due		& Still Accruing		Current		Receivable

June 30, 2012

Commercial:
Commercial non real estate	$	38	$	4	$	744	$	786	$	16	$	9,590	$	10,392
Commercial real estate		800		278		7,123		8,201		--		79,108		87,309
Consumer:
Consumer - other		225		145		1,700		2,070		--		19,182		21,252
Consumer - automobile		13		1		10		24		--		797		821
Consumer - home equity		99		175		153		427		--		14,009		14,436
Residential 1-4 family		228		273		617		1,118		--		9,771		10,889
Total	$	1,403	$	876	$	10,347	$	12,626	$	16	$	132,457	$	145,099

December 31, 2011

Commercial:
Commercial non real estate	$	485	$	139	$	996	$	1,237	$	383	$	11,319	$	12,939
Commercial real estate		714		472		8,046		9,232		--		88,315		97,547
Consumer:
Consumer - other		422		69		2,052		2,543		--		19,753		22,296
Consumer - automobile		69		--		--		69		--		874		943
Consumer - home equity		408		47		182		578		59		13,953		14,590
Residential 1-4 family		482		--		675		1,157		--		11,181		12,338
Total	$	2,580	$	727	$	11,951	$	14,816	$	442	$	145,395	$	160,653

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 were 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 June 30, 2012, 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 $1,382,000, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $156,000. The following are loan modifications for the Corporation’s loans receivable for the three and six month periods ended June 30, 2012.

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
			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 period	Contracts		Investment		Investment		Contracts		Investment		Investment
	(in thousands)						(in thousands)
Commercial:
Commercial non real estate		--	$	--		--		3	$	238	$	238
Commercial real estate		1		175		165		1		268		258
Consumer:
Consumer - other		2		117		117		6		757		757
Residential 1-4 family		--		--		--		1		1		1
Total		3	$	292	$	282		11	$	1,264	$	1,254

	Three Months Ended June 30, 2012						Six Months Ended June 30, 2012
			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 December 31, 2011		(in thousands)					(in thousands)

Commercial:
Commercial non real estate		--	$	--	$	--		--	$	--	$	--
Commercial real estate		1		175		165		1		175		165
Consumer:
Consumer - other		--		--		--		--		--		--
Total		1	$	175	$	165		1	$	175	$	165

During the six months ended June 30, 2012, the Corporation modified 15 loans that were considered to be troubled debt restructurings. We extended the terms for 5 of these loans and the interest rate was lowered for 6 of these loans. During the six months ended June 30, 2012, the Corporation had 27 loans default that had previously been restructured, 4 of which went into default in the quarter and 13 of which went into default during the previous 12 months.