Note 4-LOANS

The following table sets forth the composition of our loan portfolio by loan type at the dates indicated.

	At June 30,			At December 31,
	2013			2012
	(in thousands)
Real estate loans:
Residential mortgage	$	65,225		$	66,539
Commercial loans:
Secured by real estate		53,457			54,673
Other		12,052			8,102
Total commercial loans		65,509			62,775

Consumer loans:
Secured by real estate		9,371			10,409
Other		1,152			1,259

Total consumer loans		10,523			11,668
Total gross loans	$	141,257		$	140,982
Less:
Net deferred loan fees		(306	)		(320	)
Allowance for loan losses		(1,691	)		(1,750	)

Total loans, net	$	139,260		$	138,912

The following table illustrates the contractual aging of the recorded investment in past due loans by class of loans as of June 30, 2013 and December 31, 2012:

As of June 30, 2013
													Recorded
					Greater than								Investment > 90
	30 - 59 Days		60 - 89 Days		90 Days		Total				Total Financing		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(dollars in thousands)

Commercial Real Estate:
Commercial Real Estate - construction	$	-	$	-	$	173	$	173	$	-	$	173	$	-
Commercial Real Estate - other		84		1,296		2,506		3,886		49,398		53,284		-
Commercial - non real estate		24		-		-		24		12,028		12,052		-

Consumer:
Consumer - Real Estate		345		5		4		354		9,017		9,371		-
Consumer - Other		4		-		-		4		1,148		1,152		4

Residential:
Residential		1,492		717		1,193		3,402		61,823		65,225		-
Total	$	1,949	$	2,018	$	3,876	$	7,843	$	133,414	$	141,257	$	4

As of December 31, 2012
													Recorded
					Greater than								Investment > 90
	30 - 59 Days		60 - 89 Days		90 Days		Total				Total Financing		Days and
	Past Due		Past Due		Past Due		Past Due		Current		Receivables		Accruing
	(dollars in thousands)

Commercial Real Estate:
Commercial Real Estate - construction	$	-	$	-	$	173	$	173	$	2,073	$	2,246	$	-
Commercial Real Estate - other		3,210		540		282		4,032		48,395		52,427		-
Commercial - non real estate		113		-		-		113		7,989		8,102		-

Consumer:
Consumer - Real Estate		59		-		13		72		10,337		10,409		-
Consumer - Other		11		5		6		22		1,237		1,259		6

Residential:
Residential		2,047		796		1,198		4,041		62,498		66,539		61
Total	$	5,440	$	1,341	$	1,672	$	8,453	$	132,529	$	140,982	$	67

The Bank uses an eight tier risk rating system to grade its commercial loans. The grade of a loan may change during the life of the loans. The risk ratings are described as follows:

Risk Grade 1 (Excellent) - Prime loans based on liquid collateral, with adequate margin or supported by strong financial statements. Probability of serious financial deterioration is unlikely. High liquidity, minimum risk, strong ratios, and low handling costs are common to these loans. This classification also includes all loans secured by certificates of deposit or cash equivalents.

Risk Grade 2 (Good) - Desirable loans of somewhat less stature than Grade 1, but with strong financial statements. Probability of serious financial deterioration is unlikely. These loans possess a sound repayment source (and/or a secondary source). These loans represent less than the normal degree of risk associated with the type of financing contemplated.

Risk Grade 3 (Satisfactory) - Satisfactory loans of average risk - may have some minor deficiency or vulnerability to changing economic conditions, but still fully collectible. There may be some minor weakness but with offsetting features or other support readily available. These loans present a normal degree of risk associated with the type of financing. Actual and projected indicators and market conditions provide satisfactory assurance that the credit shall perform in accordance with agreed terms.

Risk Grade 4 (Acceptable) - Loans considered satisfactory, but which are of slightly "below average" credit risk due to financial weaknesses or uncertainty. The loans warrant a somewhat higher than average level of monitoring to insure that weaknesses do not advance. The level of risk is considered acceptable and within normal underwriting guidelines, so long as the loan is given the proper level of management supervision.

Risk Grade 4.5 (Monitored) - Loans are considered "below average" and monitored more closely due to some credit deficiency that poses additional risk but is not considered adverse to the point of being a "classified" credit. Possible reasons for additional monitoring may include characteristics such as temporary negative debt service coverage due to weak economic conditions, borrower may have experienced recent losses from operations, declining equity and/or increasing leverage, or marginal liquidity that may affect long-term sustainability. Loans of this grade have a higher degree of risk and warrant close monitoring to insure against further deterioration. In any tables presented subsequently, Risk Grade 4.5 credits are included with Risk Grade 4 credits.

Risk Grade 5 (Other Assets Especially Mentioned) (OAEM) - Loans which possess some credit deficiency or potential weakness, which deserve close attention, but which do not yet warrant substandard classification. Such loans pose unwarranted financial risk that, if not corrected, could weaken the loan and increase risk in the future.

Risk Grade 6 (Substandard) - Loans are "substandard" whose full, final collectability does not appear to be a matter of serious doubt, but which nevertheless portray some form of well defined weakness that requires close supervision by Bank management. The noted weaknesses involve more than normal banking risk. One or more of the following characteristics may be exhibited in loans classified Substandard: (1) Loans possess a defined credit weakness and the likelihood that the loan shall be paid from the primary source of repayment is uncertain; (2) Loans are not adequately protected by the current net worth and/or paying capacity of the obligor; (3) primary source of repayment is gone, and the Bank is forced to rely on a secondary source of repayment such as collateral liquidation or guarantees; (4) distinct possibility that the Bank shall sustain some loss if deficiencies are not corrected; (5) unusual courses of action are needed to maintain a high probability of repayment; (6) the borrower is not generating enough cash flow to repay loan principal, however, continues to make interest payments; (7) the Bank is forced into a subordinated or unsecured position due to flaws in documentation; (8) loans have been restructured so that payment schedules, terms, and collateral represent concessions to the borrower when compared to normal loan terms; (9) the Bank is contemplating foreclosure or legal action due to the apparent deterioration in the loan; or (10) there is a significant deterioration in the market conditions and the borrower is highly vulnerable to these conditions.

Grade 7 (Doubtful) - Loans have all the weaknesses of those classified Substandard. Additionally, however, these weaknesses make collection or liquidation in full, based on existing conditions, improbable. Loans in this category are typically not performing in conformance with established terms and conditions. Full repayment is considered "Doubtful", but extent of loss is not currently determinable.

Risk Grade 8 (Loss) - Loans are considered uncollectible and of such little value, that continuing to carry them as an asset on the Bank's financial statements is not feasible.

The following table presents the risk category of loans by class of loans based on the most recent analysis performed and the contractual aging as of June 30, 2013 and December 31, 2012:

As of June 30, 2013
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	-	$	-	$	-
3		-		14,255		6,157
4		-		28,317		5,573
5		-		4,207		131
6		173		6,505		191
7		-		-		-
8		-		-		-
Total	$	173	$	53,284	$	12,052

As of December 31, 2012
	Commercial Real Estate		Commercial Real Estate
Loan Grade	Construction		Other		Commercial
	(dollars in thousands)
1-2	$	-	$	-	$	-
3		615		13,895		2,376
4		1,458		27,488		5,489
5		-		2,712		37
6		173		8,332		200
7		-		-		-
8		-		-		-
Total	$	2,246	$	52,427	$	8,102

For residential real estate and other consumer credit the Company also evaluates credit quality based on the aging status of the loan and by payment activity. Loans 60 or more days past due are monitored by the collection committee.

The following tables present the risk category of loans by class based on the most recent analysis performed as of June 30, 2013 and December 31, 2012:

As of June 30, 2013
(dollars in thousands)
	Residential

Loan Grade:
Pass	$	63,628
Special Mention		-
Substandard		1,597
Total	$	65,225

	Consumer -
	Real Estate		Consumer - Other
	(dollars in thousands)
Performing	$	9,360	$	1,152
Nonperforming		11		-
Total	$	9,371	$	1,152

As of December 31, 2012
	Residential
	(dollars in thousands)
Loan Grade:
Pass	$	64,668
Special Mention		-
Substandard		1,871
Total	$	66,539

	Consumer -
	Real Estate		Consumer - Other
	(dollars in thousands)
Performing	$	10,381	$	1,253
Nonperforming		28		6
Total	$	10,409	$	1,259

The following table presents the recorded investment in non-accrual loans by class as of June 30, 2013 and December 31, 2012:

	As of
	June 30, 2013		December 31, 2012
	(in thousands)

Commercial Real Estate:
Commercial Real Estate - construction	$	173	$	173
Commercial Real Estate - other		2,627		2,851
Commercial		-		-

Consumer:
Consumer - real estate		8		28
Consumer - other		-		1

Residential:
Residential		1,597		1,810

Total	$	4,405	$	4,863

The key features of the Company's loan modifications are determined on a loan-by-loan basis. Generally, our restructurings have related to interest rate reductions and loan term extensions. In the past the Company has granted reductions in interest rates, payment extensions and short-term payment forbearances as a means to maximize collectability of troubled credits. The Company has not forgiven principal to date, although this would be considered if necessary to ensure the long-term collectability of the loan. The Company's loan modifications are typically short-term in nature, although the Company would consider a long-term modification to ensure the long-term collectability of the credit. In general, a borrower must make at least six consecutive timely payments before the Company would consider a return of a restructured loan to accruing status in accordance with Federal Deposit Insurance Corporation guidelines regarding restoration of credits to accrual status.

The Bank has classified approximately $6,590,000 of its impaired loans as troubled debt restructurings as of June 30, 2013. There were no commitments to extend credit to borrowers with loans classified as troubled debt restructurings as of June 30, 2013 and December 31, 2012.

	Troubled Debt Restructurings						Troubled Debt Restructurings that Subsequently Defaulted
	For the three months ended June 30, 2013						For the three months ended June 30, 2013
	Number of Loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of Loans		Recorded Investment
			(dollars in thousands)						(dollars in thousands)
Troubled Debt Restructurings

Commercial Real Estate - Construction		-	$	-	$	-		-	$	-
Commercial Real Estate - Other		1		2,030		2,030		-		-
Commercial - non real estate		-		-		-		-		-
Residential		-		-		-		-		-
Total		1	$	2,030	$	2,030		-	$	-

	Troubled Debt Restructurings						Troubled Debt Restructurings that Subsequently Defaulted
	For the three months ended June 30, 2012						For the three months ended June 30, 2012
	Number of Loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of Loans		Recorded Investment
			(dollars in thousands)						(dollars in thousands)
Troubled Debt Restructurings

Commercial Real Estate - Construction		-	$	-	$	-		-	$	-
Commercial Real Estate - Other		-		-		-		1		63
Commercial - non real estate		1		35		34		-		-
Residential		-		-		-		-		-
Total		1	$	35	$	34		1	$	63

	Troubled Debt Restructurings						Troubled Debt Restructurings that Subsequently Defaulted
	For the six months ended June 30, 2013						For the six months ended June 30, 2013
	Number of Loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of Loans		Recorded Investment
			(dollars in thousands)						(dollars in thousands)
Commerical Real Estate - Construction		-	$	-	$	-		-	$	-
Commercial Real Estate - Other		2		2,442		2,437		-		-
Consumer - Real Estate		-		-		-		-		-
Residential		2		331		270		1		190
Total		4	$	2,773	$	2,707		1	$	190

	Troubled Debt Restructurings						Troubled Debt Restructurings that Subsequently Defaulted
	For the six months ended June 30, 2012						For the six months ended June 30, 2012
	Number of Loans		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		Number of Loans		Recorded Investment
			(dollars in thousands)						(dollars in thousands)
Troubled Debt Restructurings

Commercial Real Estate - Construction		-	$	-	$	-		-	$	-
Commercial Real Estate - Other		-		-		-		1		63
Commercial - non real estate		3		1,663		1,655		-		-
Residential		-		-		-		-		-
Total		3	$	1,663	$	1,655		1	$	63

For the majority of the Bank's impaired loans, the Bank will apply the observable market price methodology. However, the Bank may also utilize a measurement incorporating the present value of expected future cash flows discounted at the loan's effective rate of interest. To determine observable market price, collateral asset values securing an impaired loan are periodically evaluated. Maximum time of re-evaluation is every 12 months. In this process, third party evaluations are obtained and heavily relied upon. Until such time that updated evaluations are received, the Bank may discount the collateral value used.

The Bank uses the following guidelines as stated in policy to determine when to realize a charge-off, whether a partial or full loan balance. A charge down in whole or in part is realized when unsecured consumer loans, credit card credits and overdraft lines of credit reach 90 days delinquency. At 120 days delinquency, secured consumer loans are charged down to the value of collateral, if repossession of the collateral is assured and/or in the process of repossession. Consumer mortgage loan deficiencies are charged down upon the sale of the collateral or sooner upon the recognition of collateral deficiency. Commercial credits are charged down at 90 days delinquency, unless an established and approved work-out plan is in place or litigation of the credit will likely result in recovery of the loan balance. Upon notification of bankruptcy, unsecured debt is charged off. Additional charge-offs may be realized as further unsecured positions are recognized.

The following table presents loans individually evaluated for impairment by class of loans as of June 30, 2013 and December 31, 2012:

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of June 30, 2013							2013				2013
							Average		Interest		Average		Interest
	Unpaid Principal		Recorded		Related		Recorded		Income		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized		Investment		Recognized
	(dollars in thousands)										(dollars in thousands)
With no specific allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction		1,589		173		-		173		-		173		-
Commercial Real Estate - Other		3,249		3,149		-		3,172		33		3,195		60
Consumer - Real Estate		9		8		-		9		-		10		-
Consumer - Other		-		-		-		-		-		-		-
Residential		2,118		1,676		-		1,793		1		1,797		2

With a specific allowance recorded:
Commercial		-		-		-		-		-		-		-
Commercial Real Estate - Construction		-		-		-		-		-		-		-
Commercial Real Estate - Other		3,596		3,596		322		3,602		20		3,607		39
Consumer - Real Estate		-		-		-		-		-		-		-
Consumer - Other		-		-		-		-		-		-		-
Residential		-		-		-		-		-		-		-

Totals:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction	$	1,589	$	173	$	-	$	173	$	-	$	173	$	-
Commercial Real Estate - Other	$	6,845	$	6,745	$	322	$	6,774	$	53	$	6,802	$	99
Consumer - Real Estate	$	9	$	8	$	-	$	9	$	-	$	10	$	-
Consumer - Other	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Residential	$	2,118	$	1,676	$	-	$	1,793	$	1	$	1,797	$	2

							For the Three Months Ended				For the Six Months Ended
Impaired Loans							June 30,				June 30,
As of December 31, 2012							2012				2012
							Average		Interest		Average		Interest
	Unpaid Principal		Recorded		Related		Recorded		Income		Recorded		Income
	Balance		Investment		Allowance		Investment		Recognized		Investment		Recognized
	(dollars in thousands)
With no specific allowance recorded:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction		1,589		173		-		173		-		173		-
Commercial Real Estate - Other		4,869		4,535		-		758		11		751		26
Consumer - Real Estate		33		28		-		134		-		135		-
Consumer - Other		1		1		-		15		-		15		-
Residential		1,365		1,194		-		1,848		-		1,861		-

With a specific allowance recorded:
Commercial		-		-		-		-		-		-		-
Commercial Real Estate - Construction		-		-		-		-		-		-		-
Commercial Real Estate - Other		2,138		2,127		101		2,065		20		2,072		48
Consumer - Real Estate		-		-		-		-		-		-		-
Consumer - Other		-		-		-		-		-		-		-
Residential		616		616		141		-		-		-		-

Totals:
Commercial	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Commercial Real Estate - Construction	$	1,589	$	173	$	-	$	173	$	-	$	173	$	-
Commercial Real Estate - Other	$	7,007	$	6,662	$	101	$	2,823	$	31	$	2,823	$	74
Consumer - Real Estate	$	33	$	28	$	-	$	134	$	-	$	135	$	-
Consumer - Other	$	1	$	1	$	-	$	15	$	-	$	15	$	-
Residential	$	1,981	$	1,810	$	141	$	1,848	$	-	$	1,861	$	-

The ALLL has a direct impact on the provision expense. An increase in the ALLL is funded through recoveries and provision expense.

Activity in the allowance for loan and lease losses was as follows for the three and six months ended June 30, 2013 and June 30, 2012, respectively:

Allowance for Credit Losses and Recorded Investment in Financing Receivables
For the Three Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate		Commercial			Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)

Allowance for credit losses:
Beginning Balance	$	89		$	509	$	87		$	87		$	26		$	877		$	-	$	1,675
Charge-offs		-			-		-			-			(6	)		(205	)		-		(211	)
Recoveries		-			1		-			18			-			12			-		31
Provision		(89	)		163		(8	)		(30	)		5			155			-		196
Ending Balance	$	-		$	673	$	79		$	75		$	25		$	839		$	-	$	1,691

For the Six Months Ended June 30, 2013
	Commercial			Commercial					Consumer
	Construction			Real Estate			Commercial		Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)

Allowance for credit losses:
Beginning Balance	$	64		$	579		$	69	$	99		$	33		$	906		$	-	$	1,750
Charge-offs		-			(85	)		-		(7	)		(12	)		(367	)		-		(471	)
Recoveries		-			11			-		33			5			24			-		73
Provision		(64	)		168			10		(50	)		(1	)		276			-		339
Ending Balance	$	-		$	673		$	79	$	75		$	25		$	839		$	-	$	1,691

Loan Balances Individually Evaluated for Impairment
As of June 30, 2013
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Ending balance: individually evaluated for impairment	$	-	$	322	$	-	$	-	$	-	$	-	$	-	$	322

Ending balance: loans collectively evaluated for impairment	$	-	$	351	$	79	$	75	$	25	$	839	$	-	$	1,369

Loans:
Ending Balance	$	173	$	53,284	$	12,052	$	9,371	$	1,152	$	65,225	$	-	$	141,257

Ending balance: individually
evaluated for impairment	$	173	$	6,745	$	8	$	-	$	-	$	1,676	$	-	$	8,602

Ending balance: loans collectively
evaluated for impairment	$	-	$	46,539	$	12,044	$	9,371	$	1,152	$	63,549	$	-	$	132,655

For the Three Months Ended June 30, 2012

	Commercial		Commercial						Consumer
	Construction		Real Estate			Commercial			Real Estate			Consumer			Residential			Unallocated		Total

Allowance for credit losses:
Beginning Balance	$	-	$	515		$	41		$	126		$	42		$	939		$	-	$	1,663
Charge-offs		-		(72	)		-			(19	)		(1	)		(391	)		-	$	(483	)
Recoveries		-		3			-			3			4			5			-	$	15
Provision		-		324			(1	)		30			(30	)		255			-	$	578
Ending Balance	$	0	$	770		$	40		$	140		$	15		$	808		$	0	$	1,773

For the Six Months Ended June 30, 2012
	Commercial			Commercial						Consumer
	Construction			Real Estate			Commercial			Real Estate			Consumer			Residential			Unallocated		Total
	(dollars in thousands)

Allowance for credit losses:
Beginning Balance	$	10		$	393		$	53		$	146		$	46		$	870		$	-	$	1,518
Charge-offs		-			(127	)		-			(37	)		(9	)		(557	)		-	$	(730	)
Recoveries		-			8			-			8			4			10			-	$	30
Provision		(10	)		496			(13	)		23			(26	)		485			-	$	955
Ending Balance	$	0		$	770		$	40		$	140		$	15		$	808		$	0	$	1,773

Loan Balances Individually Evaluated for Impairment
As of June 30, 2012
	Commercial		Commercial				Consumer
	Construction		Real Estate		Commercial		Real Estate		Consumer		Residential		Unallocated		Total
	(dollars in thousands)
Ending balance: individually evaluated for impairment	$	-	$	229	$	-	$	-	$	-	$	-	$	-	$	229

Ending balance: loans collectively evaluated for impairment	$	-	$	541	$	40	$	140	$	15	$	808	$	-	$	1,544

Loans: Ending Balance	$	173	$	54,933	$	8,618	$	12,169	$	1,272	$	67,362	$	-	$	144,527

Ending balance: individually evaluated for impairment	$	173	$	2,814	$	-	$	130	$	12	$	1,706	$	-	$	4,835

Ending balance: loans collectively evaluated for impairment	$	-	$	52,119	$	8,618	$	12,039	$	1,260	$	65,656	$	-	$	139,692