4. Loans, net

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

	March 31,			December 31,
	2013			2012
Mortgage loans:
Fixed-rate residential	$	6,064		$	6,329
Adjustable-rate residential		3,290			3,376
Commercial real estate		72,340			75,210
Construction		78			59
Total mortgage loans		81,772			84,974
Commercial nonreal estate		9,615			9,024
Consumer loans:
Home equity		13,436			14,063
Consumer and installment		18,728			19,468
Consumer lines of credit		261			267
Total consumer loans		32,425			33,798
Total loans		123,812			127,796
Less:
Unamortized loan discount		(176	)		(181	)
Allowance for loan losses		(4,354	)		(4,367	)
Net deferred loan origination costs		167			166
Total, net	$	119,449		$	123,414
Weighted-average interest rate of loans		4.85	%		5.15	%

Information about impaired loans for the periods ended March 31, 2013 and December 31, 2012 is as follows (in thousands):

	March 31,		December 31,
	2013		2012

Loans receivable for which there is a related allowance for credit losses determined in accordance with ASC 310-10/Statement No. 114	$	5,152	$	5,339
Other impaired loans		14,471		20,508
Total impaired loans	$	19,623	$	25,847
Average monthly balance of impaired loans	$	21,792	$	29,171
Specific allowance for credit losses	$	2,364	$	2,385

Impaired Loans

For the Periods Ended March 31, 2013 and December 31, 2012

(in thousands)

March 31, 2013	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment

With no related allowance recorded:

Commercial
Commercial real estate	$	10,476	$	9,237	$	--	$	9,857
Commercial non real estate		1,131		829		--		980

Consumer
Consumer – other		3,471		2,547		--		3,009
Consumer - home equity		701		668		--		684

Residential real estate
1-4 Family		1,324		1,190		--		1,257

With a related allowance recorded:

Commercial
Commercial real estate	$	5,191	$	2,957	$	1,240	$	4,074
Commercial non real estate		202		186		49		194

Consumer
Consumer – other		1,568		1,547		959		1,558

Residential real estate
1-4 Family		475		462		116		468

Total:	$	24,539	$	19,623	$	2,364	$	22,081
Commercial		17,000		13,209		1,289		15,105
Consumer		5,740		4,762		959		5,251
Residential		1,799		1,652		116		1,725

December 31, 2012	Unpaid Principal Balance		Recorded Investment		Related Allowance		Average Recorded Investment

With no related allowance recorded:

Commercial
Commercial real estate	$	14,778	$	13,273	$	--	$	14,025
Commercial non real estate		2,004		1,680		--		1,842

Consumer
Consumer - other		4,611		3,696		--		4,154
Consumer - home equity		566		536		--		551

Residential real estate
1-4 Family		1,448		1,323		--		1,385

With a related allowance recorded:

Commercial
Commercial real estate	$	5,622	$	3,388	$	1,260	$	4,505
Commercial non real estate		206		189		49		198

Consumer
Consumer – other		1,363		1,354		962		1,358

Residential real estate
1-4 Family		416		408		114		412

Total:	$	31,014	$	25,847	$	2,385	$	28,430
Commercial		22,610		18,530		1,309		20,570
Consumer		6,540		5,586		962		6,063
Residential		1,864		1,731		114		1,797

Loans Receivable on Nonaccrual Status

As of March 31, 2013 and December 31, 2012

(in thousands)

	March 31,		December 31,
	2013		2012
Commercial
Commercial real estate	$	8,646	$	8,734
Commercial non real estate		854		835

Consumer
Consumer – other		2,755		2,287
Consumer – automobile		11		19
Consumer – home equity		462		329

Residential real estate
1-4 family		1,275		970
Total	$	14,003	$	13,174

Allowance for Loan Losses and Recorded Investment in Loans Receivable

(in thousands)

			Commercial
	Commercial		Real Estate			Consumer			Residential		Total

March 31, 2013

Allowance for loan losses:

Beginning balance	$	1,040	$	1,675		$	1,301		$	351	$	4,367
Charge-offs		--		(27	)		(39	)		--		(66	)
Recoveries		2		50			1			--		53
Provisions		--		(190	)		154			36		--
Ending balance	$	1,042	$	1,508		$	1,417		$	387	$	4,354

Loans receivable:

Ending balances:
Individually evaluated for impairment	$	1,015	$	12,194		$	4,762		$	1,652	$	19,623
Allowance for loan losses		49		1,240			959			116		2,364
Collectively evaluated for impairment imprimpairment	$	8,600	$	60,146		$	27,663		$	7,780	$	104,189
Allowance for loan losses		993		268			458			271		1,990
Ending balance	$	9,615	$	72,340		$	32,425		$	9,432	$	123,812
Total allowance for loan losses	$	1,042	$	1,508		$	1,417		$	387	$	4,354

				Commercial
	Commercial			Real Estate			Consumer			Residential			Total

December 31, 2012

Allowance for loan losses:

Beginning balance	$	1,887		$	1,920		$	484		$	258		$	4,549
Charge-offs		(118	)		(339	)		(576	)		(8	)		(1,041	)
Recoveries		52			94			5			4			155
Provisions		(781	)		--			1,388			97			704
Ending Balance	$	1,040		$	1,675		$	1,301		$	351		$	4,367

Loans receivable:

Ending balances:
Individually evaluated for impairment	$	1,869		$	16,661		$	5,586		$	1,731		$	25,847
Allowance for loan losses		49			1,260			962			113			2,384
Collectively evaluated for impairment imprimpairment	$	7,155		$	58,549		$	28,212		$	8,033		$	101,949
Allowance for loan losses		991			415			339			238			1,983
Ending balance	$	9,024		$	75,210		$	33,798		$	9,764		$	127,796
Total allowance for loan losses	$	1,040		$	1,675		$	1,301		$	351		$	4,367

Credit Quality Indicators

As of March 31, 2013 and December 31, 2012

(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
		March 31,		December 31,		March 31,		December 31,
		2013		2012		2013		2012

Grade 1 Superior quality	$	56	$	58	$	--	$	--
Grade 2 Good quality		--		--		--		--
Grade 3 Satisfactory		194		209		6,816		7,238
Grade 4 Acceptable		3,879		4,148		24,090		24,844
Grade 5 Watch		2,510		2,433		25,790		23,762
Grade 6 Special mention		1,950		1,125		3,450		6,860
Grade 7 Substandard		919		957		10,944		11,256
Grade 8 Doubtful		95		94		1,250		1,250
Total	$	9,615	$	9,024	$	72,340	$	75,210

(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
	March 31,		December 31,		March 31,		December 31,
	2013		2012		2013		2012
Grade:
Pass	$	7,382	$	7,905	$	26,867	$	27,976
Special mention		398		732		796		1,366
Substandard		1,652		1,127		4,762		4,456
Total	$	9,432	$	9,764	$	32,425	$	33,798

(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

													Residential real estate
	Other				Consumer Automobile				Home equity				1-4 family
	March 31,		December 31,		March 31,		December 31,		March 31,		December 31,		March 31,		December 31,
	2013		2012		2013		2012		2013		2012		2013		2012

Performing	$	14,208	$	16,676	$	687	$	753	$	12,768	$	13,734	$	7,780	$	8,794
Nonperforming		4,083		2,287		11		19		668		329		1,652		970
Total	$	18,291	$	18,963	$	698	$	772	$	13,436	$	13,436	$	9,432	$	9,764

(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 March 31, 2013, approximately 79% of the loan portfolio was 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 March 31, 2013, we had loans totaling $6.6 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 March 31, 2013, classified loans totaled $19.6 million, with all but one loan being collateralized by real estate. This compares to classified loans of $19.1 million at December 31, 2012. 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 March 31, 2013 and December 31, 2012 (in thousands).

					Greater
	30 – 59 Days		60 – 89 Days		Than		Total Past				Total Loans
	Past Due		Past Due		90 Days		Due		Current		Receivable

March 31, 2013

Commercial:
Commercial non real estate	$	197	$	187	$	652	$	1,036	$	8,579	$	9,615
Commercial real estate		1,712		768		6,123		8,603		63,737		72,340
Consumer:
Consumer – other		285		783		1,545		2,613		15,678		18,291
Consumer – automobile		7		--		2		9		689		698
Consumer – home equity		220		40		178		438		12,998		13,436
Residential 1-4 family		924		502		866		2,292		7,1410		9,432
Total	$	3,345	$	2,280	$	9,366	$	14,991	$	108,821	$	123,812

December 31, 2012

Commercial:
Commercial non real estate	$	146	$	110	$	646	$	902	$	8,122	$	9,024
Commercial real estate		2,525		482		6,047		9,054		66,156		75,210
Consumer:
Consumer – other		638		419		1,045		2,102		16,861		18,963
Consumer – automobile		11		5		3		19		753		772
Consumer – home equity		157		7		168		332		13,731		14,063
Residential 1-4 family		259		406		970		1,635		8,129		9,764
Total	$	3,736	$	1,429	$	8,879		14,044	$	113,752	$	127,796

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 March 31, 2013, 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 $2.6 million, and the allowance for loan losses associated with those loans, on the basis of a current evaluation of loss was $110,000. The following are loan modifications for the Corporation’s loans receivable for the three month periods ended March 31, 2013.

	Three Months Ended March 31, 2013						Three Months Ended March 31, 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		--	$	--	$	--		2	$	93	$	93
Commercial real estate		--		--		--		1		238		238
Consumer:
Consumer – other		2		177		172		87		1,170		1,170
Consumer -- home equity		2		41		41		--		--		--
Residential 1-4 family		--		--		--		1		1		1
Total		4	$	218	$	213		12	$	1,502	$	1,502

	Three Months Ended March 31, 2013						Three Months Ended March 31, 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 last twelve months	(in thousands)						(in thousands)

Commercial:
Commercial non real estate		--	$	--	$	--		--	$	--	$	--
Commercial real estate		2		--		--		--		--		--
Consumer:
Consumer – other		2		163		158		--		--		--
Total		2	$	163	$	158		--	$	--	$	--

During the three months ended March 31, 2013, the Corporation modified 4 loans that were considered to be troubled debt restructurings. We extended the terms for 4 of these loans and the interest rate was lowered for 2 of these loans. During the three months ended March 31, 2013, the Corporation had 2 loans default that had previously been restructured. A default occurs when a loan does not perform as agreed under the new terms to the point it becomes 90 days or more past due.