NOTE 7 – LOAN INFORMATION

Loans consisted of the following as of June 30, 2011 and December 31, 2010:

	(Dollars in thousands)
	June 30, 2011			December 31, 2010
Commercial, financial and agricultural	$	14,906		$	13,568
Real estate - construction and land development		2,645			4,986
Real estate - residential		147,236			148,396
Real estate - commercial		34,860			31,294
Municipal		2,289			2,035
Consumer		7,293			4,512
		209,229			204,791
Allowance for loan losses		(2,314	)		(2,326	)
Deferred costs, net		378			327
Net loans	$	207,293		$	202,792

The following table presents the allowance for loan loss activity by portfolio segment for the six months ended June 30, 2011:

	(Dollars in thousands)
	Real Estate
						Construction
						and Land						Commercial
	Residential			Commercial		Development			Home Equity			and Industrial		Consumer			Unallocated			Total

Allowance for loan losses:
Beginning balance	$	838		$	465	$	68		$	360		$	410	$	94		$	91		$	2,326
Charge-offs		-			-		(160	)		-			-		(22	)		-			(182	)
Recoveries		-			-		-			-			-		5			-			5
Provision		(105	)		36		151			(3	)		33		73			(20	)		165
Ending balance	$	733		$	501	$	59		$	357		$	443	$	150$			71		$	2,314

Changes in the allowance for loan losses were as follows for the six months ended June 30, 2010:

	(Dollars in thousands)

	June 30, 2010
Balance at beginning of year	$	2,211
Provision for loan losses		425
Charge-offs		(334	)
Recoveries of loans previously charged off		5
Balance at end of period	$	2,307

The following table sets forth information regarding the allowance for loan losses by portfolio segment as of June 30, 2011 and December 31, 2010:

	(Dollars in thousands)
	Real Estate:
					Construction and				Commercial
	Residential		Commercial		Land Development		Home Equity		& Industrial		Consumer		Unallocated		Total

June 30, 2011:
Allowance:
Ending balance:
Individually
evaluated for
impairment	$	67	$	-	$	-	$	-	$	-	$	-	$	-	$	67

Ending balance:
Collectively
evaluated for
impairment		666		501		59		357		443		150		71		2,247

Total allowance
for loan lease loss
ending balance	$	733	$	501	$	59	$	357	$	443	$	150	$	71	$	2,314

Loans:
Ending balance:
Individually
evaluated for
impairment	$	934	$	319	$	462	$	7	$	-	$	-	$	-	$	1,722

Ending balance:
Collectively
evaluated
for impairment		95,642		34,565		2,186		50,934		17,259		7,299		-		207,885

Total loans
ending balance	$	96,576	$	34,884	$	2,648	$	50,941	$	17,259	$	7,299	$	-	$	209,607


December 31, 2010:
Allowance:
Ending balance:
Individually
evaluated for
impairment	$	79	$	-	$	-	$	1	$	-	$	-	$	-	$	80

Ending balance:
Collectively
evaluated for
impairment		759		465		68		359		410		94		91		2,246

Total allowance
for loan lease loss
ending balance	$	838	$	465	$	68	$	360	$	410	$	94	$	91	$	2,326

Loans:
Ending balance:
Individually
evaluated for
impairment	$	384	$	326	$	1,001	$	8	$	-	$	-	$	-	$	1,719

Ending balance:
Collectively
evaluated
for impairment		100,303		30,998		3,990		47,927		15,662		4,519		-		203,399

Total loans
ending balance	$	100,687	$	31,324	$	4,991	$	47,935	$	15,662	$	4,519	$	-	$	205,118

The following table presents the Company’s loans by risk rating as of June 30, 2011 and December 31, 2010:

	(Dollars in thousands)
Credit quality indicators
	Real Estate
					Construction
					and Land				Commercial
	Residential		Commercial		Development		Home Equity		and Industrial		Consumer		Total
June 30, 2011:
Grade:
Pass	$	95,589	$	32,409	$	2,186	$	50,543	$	15,474	$	7,299	$	203,500
Special Mention		-		1,762		-		-		1,098		-		2,860
Substandard		987		713		462		398		687		-		3,247
Total	$	96,576	$	34,884	$	2,648	$	50,941	$	17,259	$	7,299	$	209,607

December 31, 2010:
Grade:
Pass	$	99,658	$	28,802	$	3,650	$	47,515	$	14,394	$	4,510	$	198,529
Special Mention		260		1,798		340		-		162		-		2,560
Substandard		769		724		1,001		420		1,106		9		4,029
Total	$	100,687	$	31,324	$	4,991	$	47,935	$	15,662	$	4,519	$	205,118

Credit Quality Indicators: As part of the ongoing monitoring of the credit quality of the Company’s loan portfolio, management tracks certain credit quality indicators, including trends related to (i) weighted average risk rating of commercial loans; (ii) the level of classified and criticized commercial loans; (iii) non performing loans; (iv) net charge-offs; and (v) the general economic conditions within the State of Connecticut.

The Company utilizes a risk rating grading matrix to assign a risk grade to each of its commercial loans. Loans are graded on a scale of 1 to 7. A description of each rating class is as follows:

Risk Rating 1 (Superior) – This risk rating is assigned to loans secured by cash.

Risk Rating 2 (Good) – This risk rating is assigned to borrowers of high credit quality who have primary and secondary sources of repayment which are well defined and fully confirmed.

Risk Rating 3 (Satisfactory) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment, which has primary and secondary sources of repayment that are well defined and adequately confirmed. Most credit factors are favorable, and the credit exposure is managed through normal monitoring.

Risk Rating 3.5 (Bankable with Care) – This risk rating is assigned to borrowers who are fully responsible for the loan or credit commitment and the secondary sources of repayment are weak. These loans may require more than the average amount of attention from the relationship manager.

Risk Rating 4 (Special Mention) – This risk rating is assigned to borrowers with loan obligations which may be adequately protected by the present debt service capacity and tangible net worth of the borrower, but which have potential problems that could, if not checked or corrected, eventually weaken these assets or otherwise jeopardize the repayment of principal and interest as originally intended. Most credit factors are unfavorable, and the credit exposure requires immediate corrective action.

Risk Rating 5 (Substandard) – This risk rating is assigned to borrowers who have inadequate cash flow or collateral to satisfy their loan obligations as originally defined in the loan agreement. Substandard loans may be placed on nonaccrual status if the conditions described above are generally met.

Risk Rating 6 (Doubtful) – This risk rating is assigned to a borrower or portion of a borrower’s loan with which the Company is no longer certain of the loan’s collectability. A specific reserve allocation is assigned to this portion of the loan.

Risk Rating 7 (Loss) – This risk rating is assigned to loans which have been charged off or the portion of the loan that has been charged off. “Loss” does not imply that the loan, or portion of, will never be repaid, nor does it imply that there has been a forgiveness of debt.

An age analysis of past-due loans, segregated by class of loans, as of June 30, 2011 and December 31, 2010 was as follows:

	(Dollars in thousands)
									Recorded
June 30, 2011:					Greater		Total		Investment
	30-59 Days		60-89 Days		than 90 Days		Past Due		90 Days and Accruing
Real estate:
Residential	$	-	$	114	$	81	$	195	$	-
Commercial		-		-		253		253		-
Construction and
land development		-		-		462		462		-
Home equity		29		140		-		169		-
Commercial and industrial		-		-		46		46		-
Consumer		68		21		21		110		-
Total	$	97	$	275	$	863	$	1,235	$	-

December 31, 2010:

Real estate:
Residential	$	529	$	-	$	324	$	853	$	-
Commercial		-		254		72		326		-
Construction and
land development		-		-		1,001		1,001		-
Commercial and industrial		-		-		203		203		-
Consumer		73		1		9		83		-
Total	$	602	$	255	$	1,609	$	2,466	$	-

The following table sets forth information regarding nonaccrual loans as of June 30, 2011 and December 31, 2010:

	(Dollars in thousands)
Real Estate:	June 30, 2011		December 31, 2010
Residential	$	842	$	542
Commercial		319		326
Construction and land development		462		1,001
Home equity		398		420
Commercial and industrial		46		-
Consumer		21		18
Total nonaccrual loans	$	2,088	$	2,307

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of and for the quarter ended June 30, 2011 and the year ended December 31, 2010.

	(Dollars in thousands)

											Income
			Unpaid				Average		Interest		Recognized
	Recorded		Principal		Related		Recorded		Income		Cash
	Investment		Balance		Allowance		Investment		Recognized		Basis
June 30, 2011:
With no related allowance recorded:
Real Estate:
Residential	$	372	$	386	$	-	$	248	$	-	$	-
Commercial		319		318		-		323		9		9
Construction and
land development		462		462		-		821		-		-
Home equity		7		7		-		7		-		-
Total impaired with no
related allowance		1,160		1,173		-		1,399		9		9

With an allowance recorded:
Real Estate:
Residential		562		585		67		444		10		9
Total impaired with an
allowance recorded		562		585		67		444		10		9

Total:
Real Estate:
Residential		934		971		67		692		10		9
Commercial		319		318		-		323		9		9
Construction and
land development		462		462		-		821		-		-
Home equity		7		7		-		7		-		-
	$	1,722	$	1,758	$	67	$	1,843	$	19	$	18

	(Dollars in thousands)

			Unpaid
	Recorded		Principal		Related
	Investment		Balance		Allowance
December 31, 2010:
With no related allowance recorded:
Real Estate:
Commercial	$	326	$	325	$	-
Construction and land development		1,001		1,001		-
Total impaired with no related allowance		1,327		1,326		-

With an allowance recorded:
Real Estate:
Residential		384		401		79
Home equity		8		8		1
Total impaired with an allowance recorded		392		409		80

Total:
Real Estate:
Residential		384		401		79
Commercial		326		325		-
Construction and land development		1,001		1,001		-
Home equity		8		8		1
	$	1,719	$	1,735	$	80

	Recorded
	Investment
Average recorded investment in impaired loans
during the year ended December 31, 2010	$	2,027

Related amount of interest income recognized during the
time, in the year ended December 31, 2010 that the loans
were impaired:

Total recognized	$	35

Amount recognized using a cash-basis method of accounting	$	34