Loans and Allowance for Loan Losses

12 Months Ended

Dec. 31, 2011

Loans and Allowance for Loan Losses

Note 4:      Loans and Allowance for Loan Losses

Categories of loans at December 31, include:

	2011			2010
	(In thousands)
Commercial loans	$	35,387		$	32,153
Commercial real estate		148,052			136,369
Residential real estate		61,765			63,378
Installment loans		39,243			46,877
Total gross loans		284,447			278,777
Less allowance for loan losses		(2,921	)		(2,740	)
Total loans	$	281,526		$	276,037

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Company will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection.

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on portfolio segment and impairment method as of December 31, 2011 and 2010:

	2011
	Commercial			Commercial Real Estate			Installment			Residential			Unallocated			Total
(In thousands)
Allowance for loan losses:
Balance, beginning of year	$	561		$	1,566		$	229		$	140		$	244		$	2,740
Provision charged to expense		213			1,459			265			188			(157	)		1,968
Losses charged off		(616	)		(758	)		(489	)		(261	)		––			(2,124	)
Recoveries		25			54			230			28			––			337
Balance, end of year	$	183		$	2,321		$	235		$	95		$	87		$	2,921
Ending balance:  individually evaluated for impairment	$	59		$	1,799		$	––		$	––		$	––		$	1,858
Ending balance:  collectively evaluated for impairment	$	124		$	522		$	235		$	95		$	87		$	1,063
Loans:
Ending balance:  individually evaluated for impairment	$	637		$	8,254		$	––		$	––		$	––		$	8,891
Ending balance:  collectively evaluated for impairment	$	34,750		$	139,798		$	39,243		$	61,765		$	––		$	275,556

	2010
	Commercial			Commercial Real Estate			Installment			Residential			Unallocated		Total
(In thousands)
Allowance for loan losses:
Balance, beginning of year	$	890		$	999		$	251		$	100		$	150	$	2,390
Provision charged to expense		(110	)		1,339			296			197			94		1,816
Losses charged off		(256	)		(775	)		(579	)		(160	)		––		(1,770	)
Recoveries		37			3			261			3			––		304
Balance, end of year	$	561		$	1,566		$	229		$	140		$	244	$	2,740
Ending balance:  individually evaluated for impairment	$	486		$	1,226		$	––		$	60		$	––	$	1,772
Ending balance:  collectively evaluated for impairment	$	75		$	340		$	229		$	80		$	244	$	968
Loans:
Ending balance:  individually evaluated for impairment	$	1,184		$	5,852		$	––		$	238		$	––	$	7,274
Ending balance:  collectively evaluated for impairment	$	30,969		$	130,517		$	46,877		$	63,140		$	––	$	271,503

The following tables show the portfolio quality indicators as of December 31, 2011 and 2010. For purposes of monitoring the credit quality and risk characteristics of its loan portfolio, the Company utilizes the following types of loans: commercial and commercial real estate, residential and installment.

To facilitate the monitoring of credit quality within the loan portfolio, and for purposes of analyzing historical loss rates used in the determination of the ALLL, the Company utilizes the following categories of credit grades: pass, special mention, substandard, and doubtful. The four categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on at least a quarterly basis.

The Company assigns a special mention rating to loans that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or the Company’s credit position.

The Company assigns a substandard rating to loans that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies noted are not addressed and corrected.

The Company assigns a doubtful rating to loans that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting liens on additional collateral or refinancing plans.

The following table shows the portfolio quality indicators as of December 31, 2011:

Loan Class	Commercial		Commercial Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	31,320	$	133,949	$	61,590	$	39,161	$	266,020
Special Mention		2,930		3,500		175		5		6,610
Substandard		882		6,924		––		77		7,883
Doubtful		255		3,679		––		––		3,934
	$	35,387	$	148,052	$	61,765	$	39,243	$	284,447

The following table shows the portfolio quality indicators as of December 31, 2010:

Loan Class	Commercial		Commercial Real Estate		Residential		Installment		Total
	(In thousands)
Pass Grade	$	28,416	$	122,795	$	62,517	$	46,877	$	260,605
Special Mention		134		1,141		623		––		1,898
Substandard		3,603		12,198		238		––		16,039
Doubtful		––		235		––		––		235
	$	32,153	$	136,369	$	63,378	$	46,877	$	278,777

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2011:

	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90 Days and Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans Receivable
	(In thousands)
Commercial	$	661	$	21	$	80	$	240	$	1,002	$	34,385	$	35,387
Commercial real estate		485		––		––		2,677		3,162		144,890		148,052
Installment		405		53		5		71		534		38,709		39,243
Residential		1,038		81		––		1,867		2,986		58,779		61,765
Total	$	2,589	$	155	$	85	$	4,855	$	7,684	$	276,763	$	284,447

The following table shows the loan portfolio aging analysis of the recorded investment in loans as of December 31, 2010:

	30-59 Days Past Due and Accruing		60-89 Days Past Due and Accruing		Greater Than 90 Days and Accruing		Non Accrual		Total Past Due and Non Accrual		Current		Total Loans Receivable
	(In thousands)
Commercial	$	265	$	201	$	25	$	300	$	791	$	31,362	$	32,153
Commercial real estate		567		525		––		3,163		4,255		132,114		136,369
Installment		421		159		––		240		820		46,057		46,877
Residential		529		279		––		823		1,631		61,747		63,378
Total	$	1,782	$	1,164	$	25	$	4,526	$	7,497	$	271,280	$	278,777

The following table presents impaired loans for the year ended December 31, 2011:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	532	$	532	$	––	$	525	$	28
Commercial real estate		1,805		1,805		––		1,496		87
Consumer		––		––		––		––		––
Residential		––		––		––		39		––
		2,337		2,337		––		2,060		115
Loans with a specific valuation allowance:
Commercial		105		105		59		386		10
Commercial  real estate		6,449		6,449		1,799		5,558		278
Consumer		––		––		––		––		––
Residential		––		––		––		81		––
		6,554		6,554		1,858		6,025		288
Total:
Commercial	$	637	$	637	$	59	$	911	$	38
Commercial Real Estate	$	8,254	$	8,254	$	1,799	$	7,054	$	365
Consumer	$	––	$	––	$	––	$	––	$	––
Residential	$	––	$	––	$	––	$	120	$	––

The following table presents impaired loans for the year ended December 31, 2010:

	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(In thousands)
Loans without a specific valuation allowance:
Commercial	$	518	$	518	$	––	$	510	$	22
Commercial real estate		1,186		1,186		––		1,172		45
Consumer		––		––		––		––		––
Residential		77		77		––		69		4
		1,781		1,781		––		1,751		71
Loans with a specific valuation allowance:
Commercial		666		666		486		648		38
Commercial  real estate		4,666		4,666		1,226		4,688		80
Consumer		––		––		––		––		––
Residential		161		161		60		148		3
		5,493		5,493		1,772		5,484		121
Total:
Commercial	$	1,184	$	1,184	$	486	$	1,158	$	60
Commercial Real Estate	$	5,852	$	5,852	$	1,226	$	5,860	$	125
Consumer	$	––	$	––	$	––	$	––	$	––
Residential	$	238	$	238	$	60	$	217	$	7

At December 31, 2011, the Company had certain loans that were modified in troubled debt restructurings and impaired.  The modification of terms of such loans included one or a combination of the following:  an extension of maturity, a reduction of the stated interest rate or a permanent reduction of the recorded investment in the loan. 

The following table presents information regarding troubled debt restructurings by class for the year ended December 31, 2011:

	Year Ended December 31, 2011
	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
			(In thousands)
Commercial		5	$	91	$	58
Commercial real estate		5		716		315
Residential		––		––		––
Consumer		––		––		––

The troubled debt restructurings described above increased the allowance for loan losses by $426,000 and did not result in any charge offs during the year ended December 31, 2011.

There were no defaults of any of the restructurings described above in the last 12 months.