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, 2015
(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 12/31/2014	$	516		$	1,943	$	699		$	37		$	72		$	1,424	$	296	$	404		$	5,391
Charge-offs		-			-		-			-			(14	)		-		-		-			(14	)
Recoveries		-			-		-			8			-			-		1		-			9
Provision		(179	)		120		(136	)		(13	)		24			201		50		(67	)		-
Ending balance at 3/31/2015	$	337		$	2,063	$	563		$	32		$	82		$	1,625	$	347	$	337		$	5,386

Ending balances individually evaluated for impairment	$	160		$	449	$	307		$	-		$	-		$	171	$	49	$	-		$	1,136

Ending balances collectively evaluated for impairment	$	177		$	1,614	$	256		$	32		$	82		$	1,454	$	298	$	337		$	4,250

Loans Receivable
Individually evaluated for impairment	$	293		$	3,261	$	3,604		$	-		$	-		$	1,613	$	119				$	8,890
Collectively evaluated for impairment		29,596			162,150		35,164			3,056			18,620			145,194		42,034					435,814
Ending balance at 3/31/2015	$	29,889		$	165,411	$	38,768		$	3,056		$	18,620		$	146,807	$	42,153				$	444,704

	As of and for the Year Ended December 31, 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		(171	)		(560	)		(313	)		(18	)		(139	)		(172	)		(91	)		-		(1,464	)
Recoveries		86			-			65			10			-			22			5			-		188
Provision		(363	)		183			535			27			15			313			(932	)		222		-
Ending balance at 12/31/2014	$	516		$	1,943		$	699		$	37		$	72		$	1,424		$	296		$	404	$	5,391

Ending balances individually evaluated for impairment	$	246		$	456		$	470		$	-		$	-		$	173		$	-		$	-	$	1,345

Ending balances collectively evaluated for impairment	$	270		$	1,487		$	229		$	37		$	72		$	1,251		$	296		$	404	$	4,046

Loans Receivable
Individually evaluated for impairment	$	316		$	3,272		$	3,620		$	-		$	-		$	1,550		$	70				$	8,828
Collectively evaluated for impairment		26,608			162,256			35,465			3,015			19,700			141,927			42,662					431,633
Ending balance at 12/31/2014	$	26,924		$	165,528		$	39,085		$	3,015		$	19,700		$	143,477		$	42,732				$	440,461

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 methodologies for estimating specific and general losses in the portfolio.

Credit Quality Indicators

	As of March 31, 2015
(In thousands)	Commercial and Industrial		Commercial Real Estate		Construction and Land		Consumer		Student		Residential Real Estate		Home Equity Line of Credit		Total
Grade:
Pass	$	26,539	$	151,873	$	30,562	$	3,052	$	18,620	$	136,593	$	37,595	$	404,834
Special mention		1,781		6,170		4,926		-		-		2,416		1,972		17,265
Substandard		1,569		7,368		3,137		4		-		7,109		2,537		21,724
Doubtful		-		-		143		-		-		689		49		881
Loss		-		-		-		-		-		-		-		-
Total	$	29,889	$	165,411	$	38,768	$	3,056	$	18,620	$	146,807	$	42,153	$	444,704

	December 31, 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	$	23,255	$	154,106	$	31,127	$	2,990	$	19,700	$	132,168	$	37,423	$	400,769
Special mention		1,917		3,992		3,687		21		-		2,299		2,663		14,579
Substandard		1,752		7,430		4,271		4		-		9,010		2,587		25,054
Doubtful		-		-		-		-		-		-		59		59
Loss		-		-		-		-		-		-		-		-
Total	$	26,924	$	165,528	$	39,085	$	3,015	$	$19,700	$	143,477	$	42,732	$	440,461

Age Analysis of Past Due Loans Receivable

	As of March 31, 2015
(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	$	156	$	88	$	127	$	371	$	29,518	$	29,889	$	2	$	156
Commercial real estate		96		912		-		1,008		164,403		165,411		-		96
Construction and land		-		143		-		143		38,625		38,768		-		144
Consumer		18		4		-		22		3,034		3,056		-		-
Student (U.S. Government guaranteed)		1,836		1,069		2,721		5,626		12,994		18,620		2,721		-
Residential real estate		1,215		474		1,089		2,778		144,029		146,807		-		1,147
Home equity line of credit		630		129		50		809		41,344		42,153		-		50
Total	$	3,951	$	2,819	$	3,987	$	10,757	$	433,947	$	444,704	$	2,723	$	1,593

	As of December 31, 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	$	140	$	106	$	-	$	246	$	26,678	$	26,924	$	-	$	166
Commercial real estate		444		-		-		444		165,084		165,528		-		98
Construction and land		551		145		-		696		38,389		39,085		-		1
Consumer		8		18		-		26		2,989		3,015		-		-
Student (U.S. Government guaranteed)		1,445		830		4,551		6,826		12,874		19,700		4,551		-
Residential real estate		798		1,242		459		2,499		140,978		143,477		-		962
Home equity line of credit		50		108		-		158		42,574		42,732		-		-
Total	$	3,436	$	2,449	$	5,010	$	10,895	$	429,566	$	440,461	$	4,551	$	1,227

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 March 31, 2015, $2.7 million of the student loans were 90 days or more past due and still accruing.

Impaired Loans Receivable

	March 31, 2015
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	79	$	105	$	-	$	82	$	2
Commercial real estate		1,434		2,001		-		1,436		16
Construction and land		2,332		2,649		-		2,336		26
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		826		998		-		828		4
Home equity line of credit		70		70		-		70		-
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	214	$	222	$	160	$	217	$	1
Commercial real estate		1,827		1,827		449		1,831		22
Construction and land		1,272		1,272		307		1,275		17
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		787		787		171		787		5
Home equity line of credit		49		49		49		49		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	293	$	327	$	160	$	299	$	3
Commercial real estate		3,261		3,828		449		3,267		38
Construction and land		3,604		3,921		307		3,611		43
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		1,613		1,785		171		1,615		9
Home equity line of credit		119		119		49		119		-
Consumer		-		-		-		-		-
Total	$	8,890	$	9,980	$	1,136	$	8,911	$	93

	December 31, 2014
(In thousands)	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no specific allowance recorded:
Commercial and industrial	$	20	$	50	$	-	$	33	$	-
Commercial real estate		1,438		2,006		-		1,722		108
Construction and land		1,577		1,893		-		1,737		79
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		1,220		1,477		-		1,351		19
Home equity line of credit		70		70		-		70		3
Consumer		-		-		-		-		-

With an allowance recorded:
Commercial and industrial	$	296	$	304	$	246	$	312	$	11
Commercial real estate		1,834		1,834		456		1,835		102
Construction and land		2,043		2,043		470		2,064		110
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		330		338		173		445		21
Home equity line of credit		-		-		-		-		-
Consumer		-		-		-		-		-

Total:
Commercial and industrial	$	316	$	354	$	246	$	345	$	11
Commercial real estate		3,272		3,840		456		3,557		210
Construction and land		3,620		3,936		470		3,801		189
Student (U.S. Government guaranteed)		-		-		-		-		-
Residential real estate		1,550		1,815		173		1,796		40
Home equity line of credit		70		70		-		70		3
Consumer		-		-		-		-		-
Total	$	8,828	$	10,015	$	1,345	$	9,569	$	453

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, 2015, there were $5.4 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 $8.9 million at March 31, 2015, representing an increase of $62,000 from December 31, 2014. Approximately $8.6 million of loans classified as impaired at March 31, 2015 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 months ended March 31, 2015 and 2014.

Troubled Debt Restructurings

	Three Months Ended March 31, 2015						Three Months Ended March 31, 2014
			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		-	$	-	$	-		1	$	65	$	65
Commercial real estate		-		-		-		-		-		-
Construction and land		-		-		-		-		-		-
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		-		-		-		-		-		-

There were no loans modified in a troubled debt restructuring ("TDRs") or subsequent defaults on TDRs occurring within 12 months of modification during the three months ended March 31, 2015. At the end of the 2015 quarter, 13 TDRs, totaling $7.9 million, remain in the portfolio. Eleven of the loans, totaling $7.4 million, were on accrual status and performing in accordance with the modified terms. The remaining two loans, totaling $0.5 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.

At March 31, 2015, the Company had no foreclosed residential real estate properties in its possession. There were two residential real estate properties with a total carrying value of $543,000 that were in the process of foreclosure.

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

(Dollars in thousands)	March 31, 2015			December 31, 2014			March 31, 2014
Non-accrual loans	$	1,593		$	1,227		$	2,002
Other real estate owned		1,406			1,406			1,406
Non-performing corporate bond investments, at fair value		-			-			1,861
Total non-performing assets		2,999			2,633			5,269
Restructured loans still accruing		7,402			7,431			8,598
Student loans (U.S. Government guaranteed) past due 90 days or more and still accruing		2,721			4,551			7,017
Loans past due 90 or more days and still accruing		2			-			358
Total non-performing and other risk assets	$	13,124		$	14,615		$	21,242

Allowance for loan losses to total loans		1.21	%		1.22	%		1.49	%
Non-accrual loans to total loans		0.36	%		0.28	%		0.45	%
Allowance for loan losses to non-accrual loans		338.10	%		439.36	%		331.22	%
Total non-accrual loans and restructured loans still accruing to total loans		2.02	%		1.97	%		2.38	%
Allowance for loan losses to non-accrual loans and restructured loans still accruing		59.88	%		62.27	%		62.56	%
Total non-performing assets to total assets		0.50	%		0.43	%		0.87	%

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