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NOTE 4 - ALLOWANCE FOR LOAN LOSSES
 9 Months Ended
Sep. 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 September 30, 2012  
          Real Estate       Real Estate       Real Estate                                  
    Commercial       Commercial       Construction       Mortgage       Installment       Other       Unallocated       Total  
Allowance for Loan Losses                                                                
Balance June 30, 2012   $ 1,260     $ 6,586     $ 1,387     $ 925     $ 141     $ 768     $ 665     $ 11,732  
Charge-offs     (250 )     (113 )     (492 )     (143 )     (48 )     (48 )             (1,094 )
Recoveries     13       —       43       1       29       3               89  
Provisions for loan losses     (261 )     435       (23 )     422       —       60       67       700  
Balance September 30, 2012   $ 762     $ 6,908     $ 915     $ 1,205     $ 122     $ 783     $ 732     $ 11,427  

      For the three months ended September 30, 2011  
          Real Estate       Real Estate       Real Estate                                  
    Commercial       Commercial       Construction       Mortgage       Installment       Other       Unallocated       Total  
Allowance for Loan Losses                                                                
Balance June 30, 2011   $ 1,931     $ 8,778     $ 1,339     $ 1,015     $ 251     $ 745     $ 687     $ 14,746  
Charge-offs     (54 )     (1,115 )     (159 )     (73 )     (42 )     (128 )             (1,571 )
Recoveries     59       —       —       2       35       —               96  
Provisions for loan losses     (229 )     394       130       (13 )     (34 )     123       29       400  
Balance September 30, 2011   $ 1,707     $ 8,057     $ 1,310     $ 931     $ 210     $ 740     $ 716     $ 13,671  

      For the nine months ended September 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     (456 )     (1,730 )     (822 )     (333 )     (190 )     (120 )             (3,651 )
Recoveries     39       63       80       37       94       9               322  
Provisions for loan losses     (154 )     1,047       618       566       33       158       (168 )     2,100  
Balance September 30, 2012   $ 762     $ 6,908     $ 915     $ 1,205     $ 122     $ 783     $ 732     $ 11,427  

    As of September 30, 2012  
Reserve to impaired loans   $ —     $ 417     $ —     $ 50     $ —     $ —     $ —     $ 467  
Reserve to non-impaired loans   $ 762     $ 6,491     $ 915     $ 1,155     $ 122     $ 783     $ 732     $ 10,960  

      For the nine months ended September 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     (928 )     (1,973 )     (356 )     (354 )     (334 )     (429 )             (4,374 )
Recoveries     197       —       10       2       193       —               402  
Provisions for loan losses     921       1,591       (280 )     327       12       503       (424 )     2,650  
Balance September 30, 2011   $ 1,707     $ 8,057     $ 1,310     $ 931     $ 210     $ 740     $ 716     $ 13,671  

    As of September 30, 2011  
Reserve to impaired loans   $ 713     $ 352     $ 241     $ 119     $ —     $ —     $ —     $ 1,425  
Reserve to non-impaired loans   $ 994     $ 7,705     $ 1,069     $ 812     $ 210     $ 740     $ 716     $ 12,246  

    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 September 30, 2012  
          Real Estate     Real Estate     Real Estate                    
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Total  
Total Loans   $ 38,087     $ 290,478     $ 25,232     $ 80,897     $ 7,310     $ 47,253     $ 489,257  
Impaired Loans   $ 800     $ 7,663     $ 1,760     $ 966     $ 109     $ 275     $ 11,573  
Non-impaired loans   $ 37,287     $ 282,815     $ 23,472     $ 79,931     $ 7,201     $ 46,978     $ 477,684  

    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 September 30, 2012  
    Pass     Special Mention     Substandard     Doubtful     Total  
Commercial   $ 36,691     $ 105     $ 1,291     $ —     $ 38,087  
Real estate - commercial     268,915       69       21,494       —       290,478  
Real estate - construction     23,223       —       2,009       —       25,232  
Real estate - mortgage     78,032       —       2,865       —       80,897  
Installment     7,194       —       116       —       7,310  
Other     46,806       —       447       —       47,253  
Total   $ 460,861     $ 174     $ 28,222     $ —     $ 489,257  

    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. Effective during the year 2012, the Company modified its method of estimating the allowance for loan losses for non-impaired loans.  This modification expanded the historical loss period to twelve rolling quarters, and incorporated historical losses from 2009. For the period ended September 30, 2012, the loss look back period began in the fourth quarter of 2009 and ended with the most recent quarter. Previously the Company utilized historical loss experience based on a rolling eight quarters.  This modification, related to the use of an expanded historical loss period, had the effect of increasing the required allowance by approximately $361,000.  The Company believes that, given the recent trend in historical losses, it was prudent to increase the period examined and that the use of a longer look back period of four additional quarters was the more appropriate methodology to capture the inherent risk in the Company’s loan portfolio. 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 periodically. 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 September 30, 2012 and December 31, 2011, respectively.


Management expects modest growth in commercial real estate lending and to a lesser extent commercial, consumer and real estate mortgage 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.