Note 3. Loans and Allowance for Loan Losses

Allowance for Loan Losses and Recorded Investment in Loans Receivable

As of and for the Three Months Ended March 31, 2013
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Residential Real Estate			Home Equity Line of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance at 12/31/2012	$	932		$	1,685		$	402	$	40		$	1,691		$	1,336		$	172	$	6,258
Charge-offs		(256	)		-			-		(47	)		-			(59	)		-		(362	)
Recoveries		8			-			-		17			-			-			-		25
Provision (recovery)		58			(16	)		4		15			(133	)		212			27		167
Ending balance at 3/31/2013	$	742		$	1,669		$	406	$	25		$	1,558		$	1,489		$	199	$	6,088

Ending balances individually evaluated for impairment	$	168		$	-		$	293	$	-		$	176		$	150		$	-	$	787

Ending balances collectively evaluated for impairment	$	574		$	1,669		$	113	$	25		$	1,382		$	1,339		$	199	$	5,301

Loans Receivable
Individually evaluated for impairment	$	395		$	11,000		$	4,150	$	2		$	2,449		$	564				$	18,560
Collectively evaluated for impairment		24,214			181,589			35,764		12,793			132,944			43,815					431,119
Ending balance at 3/31/2013	$	24,609		$	192,589		$	39,914	$	12,795		$	135,393		$	44,379				$	449,679

	As of and for the Year Ended December 31, 2012
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Residential Real Estate			Home Equity Line of Credit			Unallocated			Total
Allowance for Loan Losses
Beginning balance at 12/31/2011	$	795		$	2,899		$	195	$	31		$	1,584		$	698		$	526		$	6,728
Charge-offs		(526	)		(5,004	)		-		(117	)		(126	)		(536	)		-			(6,309	)
Recoveries		7			9			-		14			2			-			-			32
Provision (recovery)		656			3,781			207		112			231			1,174			(354	)		5,807
Ending balance at 12/31/2012	$	932		$	1,685		$	402	$	40		$	1,691		$	1,336		$	172		$	6,258

Ending balances individually evaluated for impairment	$	428		$	-		$	293	$	-		$	176		$	112		$	-		$	1,009

Ending balances collectively evaluated for impairment	$	504		$	1,685		$	109	$	40		$	1,515		$	1,224		$	172		$	5,249

Loans Receivable
Individually evaluated for impairment	$	674		$	9,612		$	4,175	$	4		$	2,372		$	228					$	17,065
Collectively evaluated for impairment		26,466			183,393			35,870		9,557			134,218			44,797						434,301
Ending balance at 12/31/2012	$	27,140		$	193,005		$	40,045	$	9,561		$	136,590		$	45,025					$	451,366

The Company's allowance for loan losses has three basic components: the specific allowance, the general allowance, and the unallocated components. The specific allowance is used to individually allocate an allowance for larger balance, non-homogeneous loans identified as impaired. The general allowance is used for estimating the loss on pools of smaller-balance, homogeneous loans; including 1-4 family mortgage loans, installment loans and other consumer loans. Also, the general allowance is used for the remaining pool of larger balance, non-homogeneous loans which were not identified as impaired. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodolgies for estimating specific and general losses in the portfolio.

Credit Quality Indicators

	As of March 31, 2013
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	19,854	$	157,400	$	35,764	$	9,972	$	120,213	$	42,376	$	385,579
Special mention		2,151		17,539		-		2,818		7,030		-		29,538
Substandard		2,424		17,650		4,014		5		7,493		2,001		33,587
Doubtful		180		-		136		-		657		2		975
Loss		-		-		-		-		-		-		-
Total	$	24,609	$	192,589	$	39,914	$	12,795	$	135,393	$	44,379	$	449,679

	As of December 31, 2012
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	21,704	$	152,483	$	35,871	$	9,552	$	120,451	$	40,189	$	380,250
Special mention		2,635		21,455		-		-		9,016		2,878		35,984
Substandard		2,391		19,067		4,038		9		6,456		1,958		33,919
Doubtful		410		-		136		-		667		-		1,213
Loss		-		-		-		-		-		-		-
Total	$	27,140	$	193,005	$	40,045	$	9,561	$	136,590	$	45,025	$	451,366

Age Analysis of Past Due Loans Receivable

	As of March 31, 2013
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and Accruing		Nonaccruals
Commercial and industrial	$	349	$	49	$	154	$	552	$	24,057	$	24,609	$	-	$	395
Commercial real estate		356		-		7,096		7,452		185,137		192,589		-		7,265
Construction and land		808		-		136		944		38,970		39,914		-		136
Consumer		1,786		2,371		-		4,157		8,638		12,795		-		2
Residential real estate		999		1,474		1,282		3,755		131,638		135,393		-		2,006
Home equity line of credit		760		267		564		1,591		42,788		44,379		-		564
Total	$	5,058	$	4,161	$	9,232	$	18,451	$	431,228	$	449,679	$	-	$	10,368

	As of December 31, 2012
(In thousands)	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Financing Receivables		Carrying Amount > 90 Days and Accruing		Nonaccruals
Commercial and industrial	$	92	$	52	$	41	$	185	$	26,955	$	27,140	$	-	$	643
Commercial real estate		-		-		7,712		7,712		185,293		193,005		-		7,712
Construction and land		508		250		136		894		39,151		40,045		-		136
Consumer		39		10		5		54		9,507		9,561		1		4
Residential real estate		2,397		397		1,474		4,268		132,322		136,590		-		1,927
Home equity line of credit		1,424		-		311		1,735		43,290		45,025		131		228
Total	$	4,460	$	709	$	9,679	$	14,848	$	436,518	$	451,366	$	132	$	10,650

Impaired Loans Receivable

	March 31, 2013
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	92	$	92	$	-	$	100	$	-
Commercial real estate		11,000		13,912		-		11,225		46
Construction and land		3,689		3,689		-		3,702		35
Residential real estate		1,792		1,792		-		1,821		4
Home equity line of credit		-		-		-		-		-
Consumer		2		2		-		3		-

With an allowance recorded:
Commercial and industrial		303		303		168		304		-
Commercial real estate		-		-		-		-		-
Construction and land		463		463		293		463		5
Residential real estate		657		657		176		662		-
Home equity line of credit		564		564		150		564		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial		395		395		168		404		-
Commercial real estate		11,000		13,912		-		11,225		46
Construction and land		4,152		4,152		293		4,165		40
Residential real estate		2,449		2,449		176		2,483		4
Home equity line of credit		564		564		150		564		-
Consumer		2		2		-		3		-
Total	$	18,562	$	21,474	$	787	$	18,844	$	90

	December 31, 2012
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	109	$	109	$	-	$	136	$	2
Commercial real estate		9,612		12,523		-		11,613		650
Construction and land		3,711		3,711		-		4,134		200
Residential real estate		1,705		1,705		-		1,734		39
Home equity line of credit		47		47		-		47		1
Consumer		4		4		-		5		-
With an allowance recorded:
Commercial and industrial		565		565		428		575		5
Commercial real estate		-		-		-		-		-
Construction and land		464		464		293		594		21
Residential real estate		667		667		176		692		-
Home equity line of credit		181		181		112		180		3
Consumer		-		-		-		-		-
Total:
Commercial and industrial		674		674		428		711		7
Commercial real estate		9,612		12,523		-		11,613		650
Construction and land		4,175		4,175		293		4,728		221
Residential real estate		2,372		2,372		176		2,426		39
Home equity line of credit		228		228		112		227		4
Consumer		4		4		-		5		-
Total	$	17,065	$	19,976	$	1,009	$	19,710	$	921

Authoritative accounting guidance requires that the impairment of loans that have been separately identified for evaluation is to be measured based on the present value of expected future cash flows or, alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent (that is, if repayment of those loans is expected to be provided solely by the underlying collateral) and for which management has determined foreclosure is probable, the measure of impairment is to be based on the net realizable value of the collateral. Authoritative accounting guidance also requires certain disclosures about investments in impaired loans and the allowance for loan losses and interest income recognized on loans.

A loan is considered impaired when it is probable that the Bank will be unable to collect all principal and interest amounts according to the contractual terms of the loan agreement. Factors involved in determining impairment include, but are not limited to, expected future cash flows, financial condition of the borrower, and the current economic conditions. A performing loan may be considered impaired if the factors above indicate a need for impairment. A loan on non-accrual status may not be impaired if it is in the process of collection or if the shortfall in payment is insignificant. A delay of less than 30 days or a shortfall of less than 5% of the required principal and interest payments generally is considered "insignificant" and would not indicate an impairment situation, if in management's judgment the loan will be paid in full. Loans that meet the regulatory definitions of doubtful or loss generally qualify as impaired loans under authoritative accounting guidance. As is the case for all loans, charge-offs for impaired loans occur when the loan or portion of the loan is determined to be uncollectible.

At March 31, 2013, there were $8.9 million of commercial loans classified as substandard which were deemed not to be impaired. Impaired loans totaled $18.6 million at March 31, 2013, representing an increase of $1.5 million from December 31, 2012. The increase was due primarily to the addition of one loan which was classified as impaired because it was restructured. It is performing in accordance with the modified terms. Approximately $18.2 million of loans classified as impaired at March 31, 2013 were collateralized by commercial buildings, residential real estate, or land.

No additional funds are committed to be advanced in connection with impaired loans.

Troubled Debt Restructurings

	Three Months Ended March 31, 2013						Three Months Ended March 31, 2012
			Pre-Modification		Post-Modification				Pre-Modification		Post-Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
(Dollars in thousands)	Contracts		Investment		Investment		Contracts		Investment		Investment
Troubled Debt Restructurings
Commercial and industrial		-	$	-	$	-		-	$	-	$	-
Commercial real estate		2		2,010		2,010		-		-		-
Construction and Land		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-
Home equity line of credit		-		-		-		-		-		-

Troubled Debt Restructurings That Subsequently Defaulted
Commercial and industrial		1	$	237	$	237		-	$	-	$	-
Commercial real estate		-		-		-		-		-		-
Construction and Land		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-
Home equity line of credit		-		-		-		-		-		-

During the quarter ended March 31, 2013, there were two loans totaling $2.0 million that were identified as Troubled Debt Restructurings ("TDRs"), and one previously identified TDR, totaling $237,000, that defaulted. At the end of the quarter, ten TDRs, totaling $8.4 million, were in the portfolio. Seven of the loans, totaling $7.4 million, were on accrual status and performing in accordance with the modified terms. The remaining three loans, representing two borrowers and totaling $1.0 million, remained in nonaccrual status due to irregular payments, although none were ninety days or more past due. Appropriate specific reserves had been established. Restructured loans are included in the specific reserve calculation in the allowance for loan losses and are included in impaired loans.

Non-performing Assets, Restructured Loans Still Accruing, and Loans Contractually Past Due

(Dollars in thousands)	March 31, 2013			December 31, 2012			March 31, 2012
Non-accrual loans	$	10,368		$	10,650		$	4,846
Other real estate owned		1,406			1,406			1,776
Non-performing corporate bond investments, at fair value		79			325			276
Total non-performing assets		11,853			12,381			6,898
Restructured loans still accruing		7,384			5,556			-
Loans past due 90 or more days and still accruing		-			132			86
Total non-performing and other risk assets	$	19,237		$	18,069		$	6,984

Allowance for loan losses to total loans		1.35	%		1.39	%		1.50	%
Non-accrual loans to total loans		2.31	%		2.36	%		1.06	%
Allowance for loan losses to non-accrual loans		58.72	%		58.76	%		141.91	%
Total non-accrual loans and restructured loans still accruing to total loans		3.95	%		3.59	%		1.06	%
Allowance for loan losses to non-accrual loans and restructured loans still accruing		34.29	%		38.62	%		141.91	%
Total non-performing assets to total assets		1.99	%		2.06	%		1.16	%

Restructured loans on non-accrual status are included with non-accrual loans and not with restructured loans in the above table.