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NOTE 4 - ALLOWANCE FOR LOAN LOSSES
 12 Months Ended
Dec. 31, 2012
Allowance for Credit Losses [Text Block]

4. ALLOWANCE FOR LOAN LOSSES


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


    As of December 31, 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     (480 )     (2,681 )     (822 )     (353 )     (221 )     (145 )             (4,702 )
Recoveries     110       63       80       39       103       9               404  
Provisions for loan losses     (120 )     1,385       393       361       31       121       (71 )     2,100  
Balance December 31, 2012   $ 843     $ 6,295     $ 690     $ 982     $ 98     $ 721     $ 829     $ 10,458  
                                                                 
Reserve to impaired loans   $ —     $ 171     $ 18     $ —     $ —     $ —             $ 189  
Reserve to non-impaired loans   $ 843     $ 6,124     $ 672     $ 982     $ 98     $ 721     $ 829     $ 10,269  

    As of December 31, 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 )     (2,917 )     (405 )     (440 )     (345 )     (490 )             (5,525 )
Recoveries     212       108       10       2       206       —               538  
Provisions for loan losses     532       1,898       (502 )     417       (15 )     560       (240 )     2,650  
Balance December 31, 2011   $ 1,333     $ 7,528     $ 1,039     $ 935     $ 185     $ 736     $ 900     $ 12,656  
                                                                 
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  

    As of December 31, 2010  
          Real Estate     Real Estate     Real Estate                          
    Commercial     Commercial     Construction     Mortgage     Installment     Other     Unallocated     Total  
                                                 
Allowance for Loan Losses                                                                
Balance December 31, 2009   $ 2,018     $ 8,702     $ 3,800     $ 737     $ 391     $ 451     $ 2,440     $ 18,539  
Charge-offs     (862 )     (3,400 )     (6,663 )     (704 )     (732 )     (154 )             (12,515 )
Recoveries     76       391       40       —       490       2               999  
Provisions for loan losses     285       2,746       4,759       923       190       367       (1,300 )     7,970  
Balance December 31, 2010   $ 1,517     $ 8,439     $ 1,936     $ 956     $ 339     $ 666     $ 1,140     $ 14,993  
                                                                 
Reserve to impaired loans   $ 327     $ 563     $ —     $ 153     $ —     $ —             $ 1,043  
Reserve to non-impaired loans   $ 1,190     $ 7,876     $ 1,936     $ 803     $ 339     $ 666     $ 1,140     $ 13,950  

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


Loans                                                                
Balance December 31, 2012   $ 46,078     $ 295,630     $ 23,003     $ 74,353     $ 6,689     $ 45,941             $ 491,694  
Impaired Loans   $ 585     $ 2,962     $ 1,371     $ 684     $ 122     $ 111             $ 5,835  
Non-impaired loans   $ 45,493     $ 292,668     $ 21,632     $ 73,669     $ 6,567     $ 45,830             $ 485,859  
                                                                 
Loans                                                                
Balance December 31, 2011   $ 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 (in thousands):


    As of December 31, 2012  
    Pass     Special Mention     Substandard     Doubtful     Total  
Commercial   $ 44,486     $ 129     $ 1,463     $ —     $ 46,078  
Real estate - commercial     278,834       —       16,796       —       295,630  
Real estate - construction     21,386       —       1,617       —       23,003  
Real estate - mortgage     71,973       —       2,380       —       74,353  
Installment     6,562       —       127       —       6,689  
Other     45,658       —       283       —       45,941  
 Total   $ 468,899     $ 129     $ 22,666     $ —     $ 491,694  

    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. For the period ended December 31, 2012, the loss look back period began in the first quarter of 2010 and ended with the most recent quarter. Previously the Company utilized historical loss experience based on a rolling eight quarters.   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, the Bank’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 $143,000 and $161,000, as of December 31, 2012 and 2011, respectively.