Loans

6 Months Ended

Jun. 30, 2013

LoansAbstract

Loans

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

	At June 30,			At December 31,
	2013			2012
Residential real estate	$	28,851		$	30,064
Multi-family real estate		3,850			3,916
Commercial real estate		38,762			39,126
Land and construction		6,643			7,276
Commercial		8,864			7,158
Consumer		57			70
Total loans		87,027			87,610
Add (deduct):
Net deferred loan fees, costs and premiums		199			58
Allowance for loan losses		(2,587	)		(2,459	)
Loans, net	$	84,639		$	85,209

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-Month Period Ended June 30, 2013:
Beginning balance		$	369		$	43		$	1,742		$	130		$	256	$	0		$	2,540
Provision (credit) for loan losses			(27	)		(27	)		1,018			(162	)		23		(3	)		822
Charge-offs			0			0			(950	)		0			0		0			(950	)
Recoveries			0			0			100			72			0		3			175
Ending balance		$	342		$	16		$	1,910		$	40		$	279	$	0		$	2,587
Six-Month Period Ended June 30, 2013:
Beginning balance		$	434		$	267		$	1,372		$	166		$	216	$	4		$	2,459
Provision (credit) for loan losses			5			(251	)		2,585			(198	)		63		(10	)		2,194
Charge-offs			(97	)		0			(2,147	)		0			0		0			(2,244	)
Recoveries			0			0			100			72			0		6			178
Ending balance		$	342		$	16		$	1,910		$	40		$	279	$	0		$	2,587

	Residential			Multi-Family			Commercial			Land
	Real			Real			Real			and
	Estate			Estate			Estate			Construction			Commercial			Consumer		Total
Three-Month Period Ended June 30, 2012:
Beginning balance	$	661		$	214		$	814		$	146		$	117		$	23	$	1,975
Provision (credit) for loan losses		189			31			97			(161	)		(2	)		0		154
Charge-offs		(147	)		0			(141	)		0			0			0		(288	)
Recoveries		0			0			29			230			0			2		261
Ending balance	$	703		$	245		$	799		$	215		$	115		$	25	$	2,102
Six-Month Period Ended June 30, 2012:
Beginning balance	$	549		$	247		$	1,190		$	187		$	161		$	15	$	2,349
Provision (credit) for loan losses		301			(2	)		(210	)		133			(46	)		5		181
Charge-offs		(147	)		0			(210	)		(335	)		0			0		(692	)
Recoveries		0			0			29			230			0			5		264
Ending balance	$	703		$	245		$	799		$	215		$	115		$	25	$	2,102

	Residential		Multi-Family		Commercial		Land
	Real		Real		Real		and
	Estate		Estate		Estate		Construction		Commercial		Consumer		Total
At June 30, 2013:
Individually evaluated for impairment:
Recorded investment	$	7,291	$	0	$	8,702	$	312	$	0	$	0	$	16,305
Balance in allowance for loan losses		0	$	0	$	828	$	17	$	0	$	0	$	845
Collectively evaluated for impairment:
Recorded investment	$	21,560	$	3,850	$	30,060	$	6,331	$	8,864	$	57	$	70,722
Balance in allowance for loan losses	$	342	$	16	$	1,082	$	23	$	279	$	0	$	1,742
At December 31, 2012:
Individually evaluated for impairment:
Recorded investment	$	7,573	$	0	$	11,535	$	886	$	0	$	0	$	19,994
Balance in allowance for loan losses	$	0	$	0	$	366	$	0	$	0	$	0	$	366
Collectively evaluated for impairment:
Recorded investment	$	22,491	$	3,916	$	27,591	$	6,390	$	7,158	$	70	$	67,616
Balance in allowance for loan losses	$	434	$	267	$	1,006	$	166	$	216	$	4		2,093

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:

Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Real estate mortgage loans are typically segmented into four portfolio segments: 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.

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.

The following summarizes the loan credit quality (in thousands):

			OLEM
			(Other Loans
			Especially
	Pass		Mentioned)		Substandard		Doubtful		Loss		Total
At June 30, 2013:
Residential real estate	$	21,560	$	0	$	7,291	$	0	$	0	$	28,851
Multi-family real estate		3,850		0		0		0		0		3,850
Commercial real estate		27,570		1,379		9,813		0		0		38,762
Land and construction		4,355		1,976		312		0		0		6,643
Commercial		7,865		934		65		0		0		8,864
Consumer		57		0		0		0		0		57
Total	$	65,257	$	4,289	$	17,481	$	0	$	0	$	87,027
At December 31, 2012:
Residential real estate	$	22,491	$	0	$	7,573	$	0	$	0	$	30,064
Multi-family real estate		3,916		0		0		0		0		3,916
Commercial real estate		24,967		2,624		11,535		0		0		39,126
Land and construction		4,402		1,987		887		0		0		7,276
Commercial		7,092		66		0		0		0		7,158
Consumer		70		0		0		0		0		70
Total	$	62,938	$	4,677	$	19,995	$	0	$	0	$	87,610

Internally assigned loan grades are defined as follows:

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. 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.

Age analysis of past-due loans is as follows (in thousands):

	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 June 30, 2013:
Residential real estate	$	1,302	$	0	$	0	$	1,302	$	23,096	$	4,453	$	28,851
Multi-family real estate		0		0		0		0		3,850		0		3,850
Commercial real estate		615		0		0		615		29,445		8,702		38,762
Land and construction		0		0		0		0		6,331		312		6,643
Commercial		0		0		0		0		8,864		0		8,864
Consumer		0		0		0		0		57		0		57
Total	$	1,917	$	0	$	0	$	1,917	$	71,643	$	13,467	$	87,027
At December 31, 2012:
Residential real estate	$	0	$	2,915	$	0	$	2,915	$	22,492	$	4,657	$	30,064
Multi-family real estate		0		0		0		0		3,916		0		3,916
Commercial real estate		0		0		0		0		27,591		11,535		39,126
Land and construction		0		0		0		0		6,389		887		7,276
Commercial		699		0		0		699		6,459		0		7,158
Consumer		0		0		0		0		70		0		70
Total	$	699	$	2,915	$	0	$	3,614	$	66,917	$	17,079	$	87,610

The following summarizes the amount of impaired loans (in thousands):

	At June 30, 2013						At December 31, 2012
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate	$	7,291	$	7,798	$	0	$	7,573	$	8,024	$	0
Commercial real estate		6,987		10,418		0		8,661		11,412	$	0
Land and construction		0		0		0		886		2,410	$	0
With an allowance recorded:
Commercial real estate	$	1,715	$	2,912	$	828	$	2,874	$	2,874	$	366
Land and construction		312		511		17		0		0		0
Total:
Residential real estate	$	7,291	$	7,798	$	0	$	7,573	$	8,024	$	0
Commercial real estate	$	8,702	$	13,330	$	828	$	11,535	$	14,286	$	366
Land and construction	$	312	$	511	$	17	$	886	$	2,410	$	0
Total	$	16,305	$	21,639	$	845	$	19,994	$	24,720	$	366

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

	Three Months Ended June 30,
	2013						2012
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received
Residential real estate	$	7,370	$	56	$	93	$	7,870	$	52	$	84
Commercial real estate	$	9,579	$	0	$	68	$	14,766	$	0	$	59
Land and construction	$	568	$	0	$	11	$	4,574	$	0	$	14
Total	$	17,517	$	56	$	172	$	27,210	$	52	$	157

	Six Months Ended June 30,
	2013						2012
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received
Residential real estate	$	7,445	$	152	$	219	$	7,941	$	104	$	152
Commercial real estate	$	10,206	$	0	$	113	$	15,152	$	0	$	110
Land and construction	$	717	$	0	$	26	$	5,848	$	0	$	4
Total	$	18,368	$	152	$	358	$	28,941	$	104	$	306

No loans have been determined to be troubled debt restructurings during the six months ended June 30, 2013 or 2012.