Note 3.

Loans and Allowance for Loan Losses

Allowance for Loan Losses and Recorded Investment in Loans Receivable

	As of and for the Nine Months Ended September 30, 2014
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student			Residential Real Estate		Home Equity Line of Credit			Unallocated		Total
Allowance for Loan Losses
Beginning balance at 12/31/2013	$	964		$	2,320		$	412	$	18		$	196		$	1,261	$	1,314		$	182	$	6,667
Charge-offs		(91	)		-			-		(12	)		(126	)		-		-			-		(229	)
Recoveries		82			-			65		4			-			3		3			-		157
Provision		(366	)		(31	)		413		4			11			13		(330	)		286		-
Ending balance at 9/30/2014	$	589		$	2,289		$	890	$	14		$	81		$	1,277	$	987		$	468	$	6,595

Ending balances individually evaluated for impairment	$	237		$	1,085		$	783	$	-		$	-		$	388	$	-		$	-	$	2,493

Ending balances collectively evaluated for impairment	$	352		$	1,204		$	107	$	14		$	81		$	889	$	987		$	468	$	4,102

Loans Receivable
Individually evaluated for impairment	$	407		$	4,833		$	3,946	$	-		$	-		$	2,452	$	70				$	11,708
Collectively evaluated for impairment		24,169			159,151			33,407		3,576			22,113			139,841		43,908					426,165
Ending balance at 9/30/2014	$	24,576		$	163,984		$	37,353	$	3,576		$	22,113		$	142,293	$	43,978				$	437,873

	As of and for the Year Ended December 31, 2013
(In thousands)	Commercial and Industrial			Commercial Real Estate			Construction and Land		Consumer			Student		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		(257	)		(686	)		-		(104	)		-		(284	)		(174	)		-		(1,505	)
Recoveries		76			-			-		25			-		2			11			-		114
Provision		213			1,321			10		57			196		(148	)		141			10		1,800
Ending balance at 12/31/2013	$	964		$	2,320		$	412	$	18		$	196	$	1,261		$	1,314		$	182	$	6,667

Ending balances individually evaluated for impairment	$	211		$	505		$	321	$	-		$	-	$	276		$	-		$	-	$	1,313

Ending balances collectively evaluated for impairment	$	753		$	1,815		$	91	$	18		$	196	$	985		$	1,314		$	182	$	5,354

Loans Receivable
Individually evaluated for impairment	$	477		$	4,177		$	3,980	$	-		$	-	$	2,100		$	70				$	10,804
Collectively evaluated for impairment		24,269			172,143			28,827		3,810			27,962		140,156			43,406					440,573
Ending balance at 12/31/2013	$	24,746		$	176,320		$	32,807	$	3,810		$	27,962	$	142,256		$	43,476				$	451,377

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 September 30, 2014
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	21,911	$	150,093	$	33,410	$	3,454	$	22,113	$	129,951	$	38,702	$	399,634
Special mention		774		3,820		-		118		-		2,723		2,739		10,174
Substandard		1,891		10,071		3,943		4		-		9,561		2,537		28,007
Doubtful		-		-		-		-		-		58		-		58
Loss		-		-		-		-		-		-		-		-
Total	$	24,576	$	163,984	$	37,353	$	3,576	$	22,113	$	142,293	$	43,978	$	437,873

	As of December 31, 2013
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	21,524	$	153,940	$	28,827	$	3,803	$	27,962	$	129,677	$	39,654	$	405,387
Special mention		551		9,888		-		-		-		2,282		1,051		13,772
Substandard		2,498		12,492		3,980		7		-		9,623		2,771		31,371
Doubtful		173		-		-		-		-		674		-		847
Loss		-		-		-		-		-		-		-		-
Total	$	24,746	$	176,320	$	32,807	$	3,810	$	27,962	$	142,256	$	43,476	$	451,377

Age Analysis of Past Due Loans Receivable

	As of September 30, 2014
(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	$	170	$	-	$	25	$	195	$	24,381	$	24,576	$	-	$	263
Commercial real estate		517		-		106		623		163,361		163,984		-		106
Construction and land		-		148		3		151		37,202		37,353		-		-
Consumer		-		5		-		5		3,571		3,576		-		-
Student (U.S. Government guaranteed)		1,851		1,018		4,059		6,928		15,185		22,113		4,059		-
Residential real estate		471		880		799		2,150		140,143		142,293		-		1,864
Home equity line of credit		169		315		-		484		43,494		43,978		-		-
Total	$	3,178	$	2,366	$	4,992	$	10,536	$	427,337	$	437,873	$	4,059	$	2,233

	As of December 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	$	409	$	69	$	161	$	639	$	24,107	$	24,746	$	-	$	379
Commercial real estate		426		-		442		868		175,452		176,320		-		442
Construction and land		5		-		338		343		32,464		32,807		338		-
Consumer		18		-		-		18		3,792		3,810		-		-
Student (U.S. Government guaranteed)		2,851		761		7,917		11,529		16,433		27,962		7,917		-
Residential real estate		-		738		780		1,518		140,738		142,256		168		1,363
Home equity line of credit		497		-		-		497		42,979		43,476		-		-
Total	$	4,206	$	1,568	$	9,638	$	15,412	$	435,965	$	451,377	$	8,423	$	2,184

The Company began purchasing rehabilitated student loans under the Federal Rehabilitated Student Loan Program during the quarter ended December 31, 2012. The repayment of both principal and accrued interest are 98% guaranteed by the U.S. Department of Education. At September 30, 2014, $4.1 million of the student loans were 90 days or more past due and still accruing.

Impaired Loans Receivable

	September 30, 2014
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	26	$	50	$	-	$	36	$	-
Commercial real estate		106		106		-		106		4
Construction and land		1,182		1,182		-		1,186		46
Student (U.S. Govenment guaranteed)		-		-		-		-		-
Residential real estate		1,351		1,495		-		1,389		20
Home equity line of credit		70		70		-		70		2
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	381	$	503	$	237	$	429	$	7
Commercial real estate		4,727		4,727		1,085		4,728		180
Construction and land		2,764		2,764		783		2,775		96
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		1,101		1,103		388		1,137		18
Home equity line of credit		-		-		-		-		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	407	$	553	$	237	$	465	$	7
Commercial real estate		4,833		4,833		1,085		4,834		184
Construction and land		3,946		3,946		783		3,961		142
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		2,452		2,598		388		2,526		38
Home equity line of credit		70		70		-		70		2
Consumer		-		-		-		-		-
Total	$	11,708	$	12,000	$	2,493	$	11,856	$	373

	December 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	$	156	$	176	$	-	$	175	$	4
Commercial real estate		2,182		2,182		-		2,197		88
Construction and land		1,984		1,984		-		2,011		99
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		1,188		1,286		-		1,236		17
Home equity line of credit		70		70		-		69		-
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	321	$	365	$	211	$	340	$	2
Commercial real estate		1,995		2,009		505		2,002		92
Construction and land		1,996		1,996		321		1,998		88
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		912		912		276		940		16
Home equity line of credit		-		-		-		-		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	477	$	541	$	211	$	515	$	6
Commercial real estate		4,177		4,191		505		4,199		180
Construction and land		3,980		3,980		321		4,009		187
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		2,100		2,198		276		2,176		33
Home equity line of credit		70		70		-		69		-
Consumer		-		-		-		-		-
Total	$	10,804	$	10,980	$	1,313	$	10,968	$	406

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 September 30, 2014, there were $6.7 million of commercial loans classified as substandard which were deemed not to be impaired because borrowers continue to abide by the terms of their original loan agreements and are substandard based on their industry or changes in their cash flow that have not yet resulted in past dues. Impaired loans totaled $11.7 million at September 30, 2014, representing an increase of $904,000 from December 31, 2013. The change was due primarily to the addition of seven loans totaling $4.0 million, which were partially offset by loans that were either paid or charged off. Approximately $11.3 million of loans classified as impaired at September 30, 2014 were collateralized by commercial buildings, residential real estate, or land.

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

The following tables represent loans modified in a troubled debt restructuring ("TDRs") and defaults on TDRs occurring within 12 months of modification during the three and nine months ended September 30, 2014.

Troubled Debt Restructurings

	Three Months Ended September 30, 2014						Three Months Ended September 30, 2013
			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		-	$	-	$	-		2	$	292	$	94
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		1		1,673		1,673
Consumer		-		-		-		-		-		-
Student		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-
Home equity line of credit		-		-		-		-		-		-

Troubled Debt Restructurings That Subsequently Defaulted												-
Commercial and industrial		-		-		-		-		-		-
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
Consumer		-		-		-		-		-		-
Student		-		-		-		-		-		-
Residential real estate		-		-		-		-		-		-
Home equity line of credit		-		-		-		-		-		-

	Nine Months Ended September 30, 2014						Nine Months Ended September 30, 2013
			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		2	$	198	$	198		2	$	292	$	94
Commercial real estate		-		-		-		2		2,010		2,010
Construction and land		-		-		-		2		2,481		2,481
Consumer		-		-		-		-		-		-
Student		-		-		-		-		-		-
Residential real estate		-		-		-		1		300		300
Home equity line of credit		-		-		-		-		-		-

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

During the quarter ended September 30, 2014, there were no loans modified and deemed TDRs. At the end of the quarter, 15 TDRs, totaling $9.4 million, were in the portfolio. Eleven of the loans, totaling $8.3 million, were on accrual status and performing in accordance with the modified terms. The remaining four loans, totaling $1.1 million, remained in nonaccrual status due to irregular payments. Appropriate specific reserves have 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)	September 30, 2014			December 31, 2013			September 30, 2013
Non-accrual loans	$	2,233		$	2,184		$	5,060
Other real estate owned		1,406			4,085			1,406
Non-performing corporate bond investments, at fair value		-			1,300			128
Total non-performing assets		3,639			7,569			6,594
Restructured loans still accruing		8,323			8,613			8,564
Student loans (U.S. Government guaranteed) past due 90 days or more and still accruing		4,059			7,917			3,629
Loans past due 90 or more days and still accruing		-			506			1
Total non-performing and other risk assets	$	16,021		$	24,605		$	18,788

Allowance for loan losses to total loans		1.51	%		1.48	%		1.42	%
Non-accrual loans to total loans		0.51	%		0.48	%		1.11	%
Allowance for loan losses to non-accrual loans		295.34	%		305.27	%		128.08	%
Total non-accrual loans and restructured loans still accruing to total loans		2.41	%		2.39	%		2.99	%
Allowance for loan losses to non-accrual loans and restructured loans still accruing		62.48	%		61.75	%		47.57	%
Total non-performing assets to total assets		0.62	%		1.23	%		1.11	%

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