Loans

9 Months Ended

Sep. 30, 2012

LoansAbstract

Loans

(3) Loans.  The segments of loans are as follows (in thousands):

	At September 30,			At December 31,
	2012			2011
Residential real estate	$	32,430		$	30,434
Multi-family real estate		4,182			4,109
Commercial real estate		39,221			41,307
Land and construction		7,323			11,783
Commercial		3,959			3,713
Consumer		123			175
Total loans		87,238			91,521
Add (deduct):
Net deferred loan fees, costs and premiums		149			45
Allowance for loan losses		(1,936	)		(2,349	)
Loans, net	$	85,451		$	89,217

An analysis of the change in the allowance for loan losses follows (in thousands): 

	Residential			Multi-Family			Commercial			Land
	Real			Real			Real			and
	Estate			Estate			Estate			Construction			Commercial			Consumer		Total
Three Months Ended September 30, 2012:
Beginning balance	$	703		$	245		$	799		$	215		$	115		$	25	$	2,102
Provision (credit) for loan losses		(231	)		15			364			36			12			0		196
Charge-offs		0			(1	)		(346	)		(53	)		0			0		(400	)
Recoveries		17			0			0			17			0			4		38
Ending balance	$	489		$	259		$	817		$	215		$	127		$	29	$	1,936
Nine Months Ended September 30, 2012:
Beginning balance	$	549		$	247		$	1,190		$	187		$	161		$	15	$	2,349
Provision (credit) for loan losses		70			12			154			170			(33	)		5		378
Charge-offs		(146	)		0			(557	)		(388	)		(1	)		0		(1,092	)
Recoveries		16			0			30			246			0			9		301
Ending balance	$	489		$	259		$	817		$	215		$	127		$	29	$	1,936

	Residential Real Estate			Multi-Family Real Estate		Commercial Real Estate			Land and Construction			Consumer		Total
Three Months Ended September 30, 2011:
Beginning balance	$	1,093		$	308	$	1,400		$	197		$	77	$	3,075
Provision for loan losses		(644	)		135		374			(117	)		9		(243	)
Charge-offs		0			0		(150	)		0			0		(150	)
Recoveries		328			2		0			121			4		455
Ending balance	$	777		$	445	$	1,624		$	201		$	90	$	3,137
Nine Months Ended September 30, 2011:
Beginning balance	$	1,285		$	282	$	1,542		$	514		$	80	$	3,703
Provision (credit) for loan losses		(562	)		158		284			772			0		652
Charge-offs		(308	)		0		(202	)		(1,230	)		0		(1,740	)
Recoveries		362			5		0			145			10		522
Ending balance	$	777		$	445	$	1,624		$	201		$	90	$	3,137

	At September 30, 2012
	Residential Real Estate		Multi-Family Real Estate		Commercial Real Estate		Land and Construction		Commercial		Consumer		Total
Individually evaluated for impairment:
Recorded investment	$	7,628	$	0	$	13,933	$	905	$	0	$	0	$	22,466
Balance in allowance for loan losses	$	0	$	0	$	0	$	0	$	0	$	0	$	0
Collectively evaluated for impairment:
Recorded investment	$	24,802	$	4,182	$	25,288	$	6,418	$	3,959	$	123	$	64,772
Balance in allowance for loan losses	$	489	$	259	$	817	$	215	$	127	$	29	$	1,936

	At December 31, 2011
	Residential Real Estate		Multi-Family Real Estate		Commercial Real Estate		Land andConstruction		Consumer		Total
Individually evaluated for impairment:
Recorded investment	$	7,919	$	0	$	16,716	$	7,241	$	68	$	31,944
Balance in allowance for loan losses	$	0	$	0	$	11	$	0	$	0	$	11
Collectively evaluated for impairment:
Recorded investment	$	23,223	$	4,109	$	27,596	$	4,542	$	107	$	59,577
Balance in allowance for loan losses	$	566	$	247	$	1,323	$	187	$	15	$	2,338

(3) Loans, Continued.  The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:           Real Estate Mortgage Loans. Real estate mortgage loans are typically segmented into four categories: Residential real estate, Multi-family real estate, Commercial real estate, and Land and Construction. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board of Directors (the “Board”), including repayment capacity and source, value of the underlying property, credit history and stability. Multi-family real estate and commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company’s Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Land and construction loans to borrowers are to finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower’s equity in the project, independent appraisals, costs estimates and pre-construction sale information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for the future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

(3) Loans, Continued.           Commercial Loans. Commercial loans are primarily underwritten on the basis of the borrowers’ ability to service such debt from income. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. As a general practice, the Company takes as collateral a security interest in any available real estate, equipment, or other chattel, although loans may also be made on an unsecured basis. Collateralized working capital loans typically are secured by short-term assets whereas long-term loans are primarily secured by long-term assets.  These loans are also affected by adverse economic conditions should they prevail within the Company’s local market.          Consumer Loans.  Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

			OLEM
			(Other Loans
			Especially
	Pass		Mentioned)		Substandard		Doubtful		Loss		Total
At September 30, 2012:
Residential real estate:
Closed-end first mortgages	$	21,678	$	2,919	$	4,709	$	0	$	0	$	29,306
Closed-end second mortgages		3,124		0		0		0		0		3,124
Total residential real estate		24,802		2,919		4,709		0		0		32,430
Multi-family real estate		4,182		0		0		0		0		4,182
Commercial real estate:
Owner-occupied		9,949		1,979		78		0		0		12,006
Non-owner-occupied		12,235		1,125		13,855		0		0		27,215
Total commercial real estate		22,184		3,104		13,933		0		0		39,221
Land and construction		6,369		49		905		0		0		7,323
Commercial		3,959		0		0		0		0		3,959
Consumer		123		0		0		0		0		123
Total	$	61,619	$	6,072	$	19,547	$	0	$	0	$	87,238
At December 31, 2011:
Residential real estate:
Closed-end first mortgages	$	18,588	$	3,686	$	5,001	$	0	$	0	$	27,275
Closed-end second mortgages		3,159		0		0		0		0		3,159
Total residential real estate		21,747		3,686		5,001		0		0		30,434
Multi-family real estate		4,109		0		0		0		0		4,109
Commercial real estate:
Owner-occupied		10,132		2,012		369		0		0		12,513
Non-owner-occupied		10,822		2,764		15,208		0		0		28,794
Total commercial real estate		20,954		4,776		15,577		0		0		41,307
Land and construction		4,493		49		7,241		0		0		11,783
Commercial		3,713		0		0		0		0		3,713
Consumer		107		68		0		0		0		175
Total	$	55,123	$	8,579	$	27,819	$	0	$	0	$	91,521

Pass – a Pass loan's primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary.  These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.

 OLEM (Other Loans Especially Mentioned) – an Other Loan Especially Mentioned has potential weaknesses that deserve management's close attention.  If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company's credit position at some future date.

Substandard – a Substandard loan is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.  Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt.  They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful – a loan classified Doubtful has all the weaknesses inherent in one classified Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.  The Company fully charges off any loan classified as Doubtful.

Loss – a loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted.  This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.  The Company fully charges off any loan classified as Loss.

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	Accruing Loans
					Greater
	30-59		60-89		Than 90		Total
	Days		Days		Days		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At September 30, 2012:
Residential real estate:
Closed-end first mortgages	$	0	$	0	$	0	$	0	$	24,597	$	4,709	$	29,306
Closed-end second mortgages		0		0		0		0		3,124		0		3,124
Subtotal		0		0		0		0		27,721		4,709		32,430
Multi-family real estate		0		0		0		0		4,182		0		4,182
Commercial real estate:
Owner-occupied		0		0		0		0		11,928		78		12,006
Non-owner-occupied		0		0		0		0		13,360		13,855		27,215
Subtotal		0		0		0		0		25,288		13,933		39,221
Land and construction		0		0		0		0		6,418		905		7,323
Commercial		701		0		0		701		3,258		0		3,959
Consumer		0		0		0		0		123		0		123
Total	$	701	$	0	$	0	$	701	$	66,990	$	19,547	$	87,238
At December 31, 2011:
Residential real estate:
Closed-end first mortgages	$	0	$	768	$	0	$	768	$	21,506	$	5,001	$	27,275
Closed-end second mortgages		0		0		0		0		3,159		0		3,159
Subtotal		0		768		0		768		24,665		5,001		30,434
Multi-family real estate		0		0		0		0		4,109		0		4,109
Commercial real estate:
Owner-occupied		0		0		0		0		12,144		369		12,513
Non-owner-occupied		0		0		0		0		13,586		15,208		28,794
Subtotal		0		0		0		0		25,730		15,577		41,307
Land and construction		0		0		0		0		4,542		7,241		11,783
Commercial		0		0		0		0		3,713		0		3,713
Consumer		0		0		0		0		175		0		175
Total	$	0	$	768	$	0	$	768	$	62,934	$	27,819	$	91,521

	At September 30, 2012						At December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate-
Closed-end first mortgages	$	7,628	$	8,079	$	0	$	7,919	$	8,465	$	0
Commercial real estate:
Owner-occupied		78		78		0		369		376		0
Non-owner-occupied		13,855		16,730		0		15,208		17,584		0
Land and construction		905		2,429		0		7,241		11,652		0
Consumer		0		0		0		68		68		0
With an allowance recorded:
Commercial real estate-
Non-owner-occupied		0		0		0		1,139		1,139		11
Total:
Residential real estate-
Closed-end first mortgages	$	7,628	$	8,079	$	0	$	7,919	$	8,465	$	0
Commercial real estate:
Owner-occupied	$	78	$	78	$	0	$	369	$	376	$	0
Non-owner-occupied	$	13,855	$	16,730	$	0	$	16,347	$	18,723	$	11
Land and construction	$	905	$	2,429	$	0	$	7,241	$	11,652	$	0
Consumer	$	0	$	0	$	0	$	68	$	68	$	0
Total	$	22,466	$	27,316	$	0	$	31,944	$	39,284	$	11

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

	Three Months Ended September 30,
	2012						2011
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received
Residential real estate-
Closed-end first mortgages	$	7,688	$	52	$	102	$	11,080	$	66	$	71
Multi-family real estate	$	0	$	0	$	0	$	0	$	0	$	0
Commercial real estate:
Owner-occupied	$	78	$	0	$	0	$	296	$	0	$	0
Non-owner-occupied	$	14,199	$	0	$	63	$	18,404	$	10	$	92
Land and construction	$	2,372	$	0	$	25	$	6,746	$	0	$	28
Consumer-
Non-real estate secured	$	0	$	0	$	0	$	216	$	1	$	1
Total	$	24,337	$	52	$	190	$	36,742	$	77	$	192

	Nine Months Ended September 30,
	2012						2011
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received
Residential real estate-
Closed-end first mortgages	$	7,863	$	156	$	254	$	11,686	$	174	$	211
Multi-family real estate	$	0	$	0	$	0	$	0	$	0	$	0
Commercial real estate:
Owner-occupied	$	177	$	0	$	0	$	466	$	0	$	1
Non-owner-occupied	$	14,682	$	0	$	172	$	19,009	$	95	$	303
Land and construction	$	4,681	$	0	$	69	$	7,704	$	21	$	119
Consumer-
Non-real estate secured	$	0	$	0	$	0	$	224	$	5	$	5
Total	$	27,403	$	156	$	495	$	39,089	$	295	$	639

No loans have been determined to be restructured as troubled debt restructurings (“TDRs”) during the nine months ended September 30, 2012.  The following schedule summarizes TDRs during nine months ended September 30, 2011.  There were no loans determined to be restructured as TDR during three months ended September 30, 2011.

	Nine Months Ended September 30, 2011
	Outstanding Recorded Investment
	Number
	of		Pre-		Post-
	Contracts		Modification		Modification
Troubled Debt Restructurings:
Real estate mortgage loans:
Residential real estate:
Modified interest rate and amortization		1	$	1,289	$	1,289
Commercial real estate:
Modified interest rate and amortization		4		6,321		6,321
Land and construction:
Modified interest rate and amortization		1		2,080		2,080
Total		6	$	9,690	$	9,690

(3) Loans, Continued.  There were no defaults of TDR’s during the nine months ended September 30, 2012.  The following schedule summarizes troubled debt restructurings that subsequently defaulted during three and nine months ended September 30, 2011.

	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Troubled debt restructurings that subsequently defaulted which were restructured during the last twelve months (dollars in thousands):
Real estate mortgage loans-Land and construction		1	$	2,806		1	$	2,806