NOTE 4 - ALLOWANCE FOR LOAN LOSSES

6 Months Ended

Jun. 30, 2012

Allowance for Credit Losses [Text Block]

NOTE 4 – ALLOWANCE FOR LOAN LOSSES

The following table shows the changes in the allowance for loan losses were as follows (in thousands):

	For the three months ended June 30, 2012
	Commercial			Real Estate Commercial			Real Estate Construction			Real Estate Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance March 31, 2012	$	1,376		$	6,847		$	1,350		$	1,045		$	154		$	811		$	691		$	12,274
Charge-offs		(86	)		(1,178	)		(126	)		(190	)		(45	)		(47	)		—			(1,672	)
Recoveries		14			2			37			36			41			—			—			130
Provisions for loan losses		(44	)		915			126			34			(9	)		4			(26	)		1,000
Balance June 30, 2012	$	1,260		$	6,586		$	1,387		$	925		$	141		$	768		$	665		$	11,732

	For the three months ended June 30, 2011
			Real Estate			Real Estate			Real Estate
	Commercial		Commercial			Construction			Mortgage			Installment			Other			Unallocated		Total
Allowance for Loan Losses
Balance March 31, 2011	$	1,268	$	8,987		$	1,566		$	919		$	304		$	755		$	672	$	14,471
Charge-offs		—		(796	)		(197	)		(81	)		(124	)		—			—		(1,198	)
Recoveries		128		—			10			—			85			—			—		223
Provisions for loan losses		535		587			(40	)		177			(14	)		(10	)		15		1,250
Balance June 30, 2011	$	1,931	$	8,778		$	1,339		$	1,015		$	251		$	745		$	687	$	14,746

	For the six months ended June 30, 2012
				Real Estate				Real Estate		Real Estate
	Commercial			Commercial				Construction		Mortgage				Installment		Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2011	$	1,333		$	7,528		$	1,039		$	935		$	185		$	736		$	900		$	12,656
Charge-offs		(206	)		(1,617	)		(330	)		(190	)		(142	)		(72	)		—			(2,557	)
Recoveries		26			63			37			36			65			6			—			233
Provisions for loan losses		107			612			641			144			33			98			(235	)		1,400
Balance June 30, 2012	$	1,260		$	6,586		$	1,387		$	925		$	141		$	768		$	665		$	11,732

	As of June 30, 2012
Reserve to impaired loans	$	240	$	99	$	529	$	35	$	—	$	—	$	—	$	903
Reserve to non-impaired loans	$	1,020	$	6,487	$	858	$	890	$	141	$	768	$	665	$	10,829

	For the six months ended June 30, 2011
				Real Estate			Real Estate			Real Estate
	Commercial			Commercial			Construction			Mortgage			Installment			Other			Unallocated			Total
Allowance for Loan Losses
Balance December 31, 2010	$	1,517		$	8,439		$	1,936		$	956		$	339		$	666		$	1,140		$	14,993
Charge-offs		(874	)		(858	)		(197	)		(281	)		(292	)		(301	)		—			(2,803	)
Recoveries		138			—			10			—			158			—			—			306
Provisions for loan losses		1,150			1,197			(410	)		340			46			380			(453	)		2,250
Balance June 30, 2011	$	1,931		$	8,778		$	1,339		$	1,015		$	251		$	745		$	687		$	14,746

	As of June 30, 2011
Reserve to impaired loans	$	835	$	915	$	—	$	130	$	—	$	—	$	—	$	1,880
Reserve to non-impaired loans	$	1,096	$	7,863	$	1,339	$	885	$	251	$	745	$	687	$	12,866

	As of December 31, 2011
Reserve to impaired loans	$	450	$	606	$	504	$	37	$	13	$	—	$	—	$	1,610
Reserve to non-impaired loans	$	883	$	6,922	$	535	$	898	$	172	$	736	$	900	$	11,046

The following table shows the loan portfolio by segment as follows (in thousands):

Loans	As of June 30, 2012
				Real Estate		Real Estate		Real Estate
		Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans		$	43,471	$	282,957	$	28,927	$	45,511	$	7,920	$	46,687	$	455,473
Impaired Loans		$	1,113	$	5,945	$	8,381	$	941	$	136	$	111	$	16,627
Non-impaired loans		$	42,358	$	277,012	$	20,546	$	44,570	$	7,784	$	46,576	$	438,846

	As of December 31, 2011
			Real Estate		Real Estate		Real Estate
	Commercial		Commercial		Construction		Mortgage		Installment		Other		Total
Total Loans	$	46,160	$	276,644	$	27,463	$	47,362	$	10,925	$	47,965	$	456,519
Impaired Loans	$	1,788	$	5,998	$	9,440	$	938	$	107	$	88	$	18,359
Non-impaired loans	$	44,372	$	270,646	$	18,023	$	46,424	$	10,818	$	47,877	$	438,160

The following table shows the loan portfolio allocated by management’s internal risk ratings as defined in Footnote 1 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 (in thousands):

	As of June 30, 2012
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	41,779	$	-	$	1,692	$	—	$	43,471
Real estate - commercial		260,721		3,883		18,353		—		282,957
Real estate - construction		19,939		356		8,632		—		28,927
Real estate - mortgage		42,910		—		2,601		—		45,511
Installment		7,780		—		140		—		7,920
Other		46,404		—		283		—		46,687
Total	$	419,533	$	4,239	$	31,701	$	—	$	455,473

	As of December 31, 2011
	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	39,319	$	3,067	$	3,774	$	—	$	46,160
Real estate - commercial		248,696		5,055		22,893		—		276,644
Real estate - construction		17,624		167		9,672		—		27,463
Real estate - mortgage		43,760		886		2,716		—		47,362
Installment		10,702		—		223		—		10,925
Other		47,638		—		327		—		47,965
Total	$	407,739	$	9,175	$	39,605	$	—	$	456,519

The allowance for loan losses is established through a provision for loan losses based on management’s evaluation of the risks inherent in the loan portfolio. In determining levels of risk, management considers a variety of factors, including, but not limited to, asset classifications, economic trends, industry experience and trends, geographic concentrations, estimated collateral values, historical loan loss experience, and the Company’s underwriting policies. During the quarter ended June 30, 2012, the Company extended the loss look back period from two years to three years to expand the data range for historical loss factors. The allowance for loan losses is maintained at an amount management considers adequate to cover the probable losses in loans receivable. While management uses the best information available to make these estimates, future adjustments to allowances may be necessary due to economic, operating, regulatory, and other conditions that may be beyond the Company’s control. The Company also engages a third party credit review consultant to analyze the Company’s loan loss adequacy each calendar quarter. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on judgments different from those of management.

The allowance for loan losses is comprised of several components including the specific, formula and unallocated allowance relating to loans in the loan portfolio. Our methodology for determining the allowance for loan losses consists of several key elements, which include:

● Specific Allowances. A specific allowance is established when management has identified unique or particular risks that were related to a specific loan that demonstrated risk characteristics consistent with impairment. Specific allowances are established when management can estimate the amount of an impairment of a loan.

● Formula Allowance. The formula allowance is calculated by applying loss factors through the assignment of loss factors to homogenous pools of loans. Changes in risk grades of both performing and nonperforming loans affect the amount of the formula allowance. Loss factors are based on our historical loss experience and such other data as management believes to be pertinent. Management, also, considers a variety of subjective factors, including regional economic and business conditions that impact important segments of our portfolio, loan growth rates, the depth and skill of lending staff, the interest rate environment, and the results of bank regulatory examinations and findings of our internal credit examiners to establish the formula allowance.

● Unallocated Allowance. The unallocated loan loss allowance represents an amount for imprecision or uncertainty that is inherent in estimates used to determine the allowance.

The Company also maintains a separate allowance for off-balance-sheet commitments. A reserve for unfunded commitments is maintained at a level that, in the opinion of management, is adequate to absorb probable losses associated with commitments to lend funds under existing agreements, for example, NVB’s commitment to fund advances under lines of credit. The reserve amount for unfunded commitments is determined based on our methodologies described above with respect to the formula allowance. The allowance for off-balance-sheet commitments is included in accrued interest payable and other liabilities on the consolidated balance sheet and was $183,000 and $161,000, as of June 30, 2012 and December 31, 2011, respectively.

Management anticipates modest growth in commercial lending and commercial real estate and to a lesser extent consumer and real estate mortgage lending, while it anticipates a further decline in construction lending. As a result, future provisions may be required and the ratio of the allowance for loan losses to loans outstanding may increase to reflect portfolio risk, increasing concentrations, loan type and changes in economic conditions. In addition, the regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses, and may require the Company to make additions to the allowance based on their judgment about information available to them at the time of their examinations.