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Loans

6 Months Ended

Jun. 30, 2011

Note 3 – Loans

The composition of net loans receivable at June 30, 2011 and December 31, 2010:

(Dollars in thousands)	June 30, 2011	December 31, 2010

Commercial and industrial loans	$ 14,087	$ 15,045
Construction	18,028	20,862
Commercial real estate	206,618	204,407
Residential real estate	99,590	96,659
Consumer and other	1,395	1,395
	339,718	338,368
Unearned net loan origination fees	(154)	(134)
Allowance for loan losses	(7,536)	(6,397)
Net Loans Receivable	$ 332,028	$ 331,837

An age analysis of loans receivable which are past due as of June 30, 2011 and December 31, 2010 is as follows:

							Recorded
							Investment
			Greater			Total	> 90 Days
	30-59 Days	60-89 days	Than	Total Past		Financing	and
(Dollars in thousands)	Past Due	Past Due	90 Days (a)	Due	Current	Receivables	Accruing

June 30, 2011
Commercial and industrial	$ 225	$ 191	$ 93	$ 509	$ 13,578	$ 14,087	$ 29
Construction	1,576	-	4,000	5,576	12,452	18,028	1,000
Commercial real estate	2,739	2,386	19,741	24,866	181,752	206,618	-
Residential real estate	502	1,024	2,257	3,783	95,807	99,590	-
Consumer and other	10	23	-	33	1,362	1,395	-
Total	$ 5,052	$ 3,624	$ 26,091	$ 34,767	$ 304,951	$ 339,718	$ 1,029

December 31, 2010
Commercial and industrial	$ 182	$ 229	$ 98	$ 509	$ 14,536	$ 15,045	$ 20
Construction	-	-	6,430	6,430	14,432	20,862	-
Commercial real estate	2,316	3,946	14,959	21,221	183,186	204,407	29
Residential real estate	3,029	-	1,244	4,273	92,386	96,659	-
Consumer and other	3	16	-	19	1,376	1,395	-
Total	$ 5,530	$ 4,191	$ 22,731	$ 32,452	$ 305,916	$ 338,368	$ 49

(a) includes loans greater than 90 days past due and still accruing and non-accrual loans

Loans which the accrual of interest has been discontinued at June 30, 2011 and December 31, 2010 were:

(Dollars in thousands)	June 30, 2011	December 31, 2010

Commercial and industrial	$ 64	$ 78
Construction	3,000	6,430
Commercial real estate	19,741	14,930
Residential real estate	2,257	1,244
Consumer and other	-	-
Total	$ 25,062	$ 22,682

The following table presents changes in the allowance for loan losses for the three and six months ended June 30, 2011:

	Commercial		Commercial	Residential
(Dollars in thousands)	and Industrial	Construction	Real Estate	Real Estate	Consumer	Unallocated	Total
Three Months Ended:
June 30, 2011
Beginning balance	$ 448	$ 1,347	$ 3,953	$ 832	$ 54	$ 592	$ 7,226
Charge-offs	(13)	(909)	(394)	-	(11)	-	(1,327)
Recoveries	2	516	1	-	6	-	525
Provision	(9)	15	1,213	113	(4)	(216)	1,112
Ending balance	$ 428	$ 969	$ 4,773	$ 945	$ 45	$ 376	$ 7,536

Six Months Ended:
June 30, 2011
Beginning balance	$ 436	$ 1,183	$ 3,760	$ 798	$ 56	$ 164	$ 6,397
Charge-offs	(13)	(909)	(395)	(12)	(23)	-	(1,352)
Recoveries	3	516	8	-	13	-	540
Provision	2	179	1,400	159	(1)	212	1,951
Ending balance	$ 428	$ 969	$ 4,773	$ 945	$ 45	$ 376	$ 7,536

The following table presents the balance in the allowance of loan losses at June 30, 2011 and December 31, 2010 disaggregated on the basis of our impairment method by class of loans receivable along with the balance of loans receivable by class disaggregated on the basis of our impairment methodology:

	Allowance for Loan Losses			Loans Receivable
		Balance	Balance
		Related to	Related to
		Loans	Loans		Individually	Collectively
		Individually	Collectively		Evaluated	Evaluated
		Evaluated for	Evaluated for		for	for
(Dollars in thousands)	Balance	Impairment	Impairment	Balance	Impairment	Impairment
June 30, 2011
Commercial and industrial	$ 428	$ 62	$ 366	$ 14,087	$ 85	$ 14,002
Construction	969	55	914	18,028	3,000	15,028
Commercial real estate	4,773	1,816	2,957	206,618	21,522	185,096
Residential real estate	945	221	724	99,590	2,257	97,333
Consumer and other loans	45	-	45	1,395	-	1,395
Unallocated	376	-	-	-	-	-
Total	$ 7,536	$ 2,154	$ 5,006	$ 339,718	$ 26,864	$ 312,854

December 31, 2010
Commercial and industrial	$ 436	$ 54	$ 382	$ 15,045	$ 78	$ 14,967
Construction	1,183	610	573	20,862	6,636	14,226
Commercial real estate	3,760	493	3,267	204,407	15,514	188,893
Residential real estate	798	233	565	96,659	1,244	95,415
Consumer and other loans	56	-	56	1,395	-	1,395
Unallocated	164	-	-	-	-	-
Total	$ 6,397	$ 1,390	$ 4,843	$338,368	$ 23,472	$ 314,896

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans. It is management's and the Board of Directors' responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms, and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition, payment status and other information; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system as defined below is consistent with the system used by regulatory agencies and consistent with industry practices. Loans rated Substandard, Doubtful or Loss is consistent with the regulatory definitions of classified assets.

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.

Special Mention: This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers' future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans where the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers' ability to make scheduled payments. The weaknesses require close supervision by our management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors is continuously monitored. Once these factors are questionable the loan will be considered for a downgrade and a full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted. Such loans are fully charged off.

The following tables illustrate our credit risk profile by creditworthiness category as of June 30, 2011 and December 31, 2010:

	June 30, 2011
		Special
(Dollars in thousands)	Pass	Mention	Substandard	Doubtful	Total

Commercial and industrial	$ 13,434	$ 568	$ 76	$ 9	$ 14,087
Construction	11,520	566	5,942	-	18,028
Commercial real estate	169,478	9,995	27,145	-	206,618
Residential real estate	95,043	458	4,089	-	99,590
Consumer and other	1,384	-	11	-	1,395
	$ 290,859	$ 11,587	$ 37,263	$ 9	$ 339,718

	December 31, 2010
		Special
(Dollars in thousands)	Pass	Mention	Substandard	Doubtful	Total

Commercial and industrial	$ 14,268	$ 679	$ 75	$ 23	$ 15,045
Construction	10,669	2,753	7,440	-	20,862
Commercial real estate	162,147	19,880	21,920	460	204,407
Residential real estate	93,884	1,083	1,681	11	96,659
Consumer and other	1,382	-	13	-	1,395
	$ 282,350	$ 24,395	$ 31,129	$ 494	$ 338,368

A loan is considered impaired, in accordance with the impairment accounting guidance (FASB ASC 310-10-35-16), when based on current information and events, it is probable that we will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans 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, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The average recorded investment in impaired loans is calculated using the average of impaired loans over the past five quarter-end periods. We recognize income on impaired loans under the cash basis when the collateral on the loan is sufficient to cover the outstanding obligation to the Company. If these factors do not exist, we will record all payments as a reduction of principal on such loans.

The following table reflects our impaired loans as of June 30, 2011 and December 31, 2010:

		Unpaid		Average	Interest
	Recorded	Principal	Related	Recorded	Income
(Dollars in thousands)	Investment	Balance	Allowance	Investment	Recognized

June 30, 2011
With no related allowance recorded:
Commercial and industrial	$ -	$ -	$ -	$ 19	$ -
Construction	2,604	2,908	-	3,795	1
Commercial real estate	8,709	9,468	-	8,859	80
Residential real estate	1,597	1,597	-	816	17
Consumer and other	-	-	-	3	-

With an allowance recorded:
Commercial and industrial	85	98	62	77	-
Construction	396	396	55	1,941	-
Commercial real estate	12,813	13,672	1,816	9,694	105
Residential real estate	660	672	221	611	1
Consumer and other	-	-	-	-	-

Total:
Commercial and industrial	$ 85	$ 98	$ 62	$ 96	$ -
Construction	3,000	3,304	55	5,736	1
Commercial real estate	21,522	23,140	1,816	18,773	165
Residential real estate	2,257	2,269	221	1,427	18
Consumer and other	-	-	-	3	-
	$ 26,864	$ 28,811	$ 2,154	$ 25,815	$ 204

December 31, 2010
With no related allowance recorded:
Commercial and industrial	$ -	$ -	$ -	$ 188	$ -
Construction	3,230	3,535	-	2,885	38
Commercial real estate	4,863	5,284	-	8,122	118
Residential real estate	560	560	-	849	7
Consumer and other	-	-	-	9	-

With an allowance recorded:
Commercial and industrial	78	78	54	71	-
Construction	3,406	5,481	610	2,568	-
Commercial real estate	10,651	11,453	493	10,379	299
Residential real estate	684	684	233	449	1
Consumer and other	-	-	-	-	-

Total:
Commercial and industrial	$ 78	$ 78	$ 54	$ 259	$ -
Construction	6,636	9,016	610	5,453	38
Commercial real estate	15,514	16,737	493	18,501	417
Residential real estate	1,244	1,244	233	1,298	8
Consumer and other	-	-	-	9	-
	$ 23,472	$ 27,075	$ 1,390	$ 25,520	$ 463

- Definition

The entire disclosure for information about short-term and long-term debt arrangements, which includes amounts of borrowings under each line of credit, note payable, commercial paper issue, bonds indenture, debenture issue, own-share lending arrangements and any other contractual agreement to repay funds, and about the underlying arrangements, rationale for a classification as long-term, including repayment terms, interest rates, collateral provided, restrictions on use of assets and activities, whether or not in compliance with debt covenants, and other matters important to users of the financial statements, such as the effects of refinancing and noncompliance with debt covenants.

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