Note 8 - Loans & Allowance for Loan Losses

6 Months Ended

Jun. 30, 2013

Receivables [Abstract]

Loans, Notes, Trade and Other Receivables Disclosure [Text Block]

8. LOANS & ALLOWANCE FOR LOAN LOSSES

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off are stated at the principal amount outstanding, net of deferred loan fees and costs. Interest income is accrued on the principal amount outstanding. Loan origination and commitment fees and related direct costs are deferred and amortized to income over the term of the respective loan and loan commitment period as a yield adjustment.

Loans held-for-sale consists of residential mortgage loans that are carried at the lower of aggregate cost or fair value. Net unrealized losses, if any, are recognized through a valuation allowance charged to income. Gains and losses on residential mortgages held-for-sale are included in non-interest income.

QNB maintains an allowance for loan losses, which is intended to absorb probable known and inherent losses in the outstanding loan portfolio. The allowance is reduced by actual credit losses and is increased by the provision for loan losses and recoveries of previous losses. The provisions for loan losses are charged to earnings to bring the total allowance for loan losses to a level considered necessary by management.

The allowance for loan losses is based on management’s continuing review and evaluation of the loan portfolio. The level of the allowance is determined by assigning specific reserves to individually identified problem credits and general reserves to all other loans. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. The portion of the allowance that is allocated to internally criticized and non-accrual loans is determined by estimating the inherent loss on each credit after giving consideration to the value of underlying collateral. The general component covers pools of loans by loan class including commercial loans not considered impaired, as well as smaller balance homogeneous loans, such as residential real estate, home equity and other consumer loans. These pools of loans are evaluated for loss exposure based upon historical loss rates. These loss rates are based on a three year history of charge-offs and are more heavily weighted for recent experience for each of these categories of loans, adjusted for qualitative factors. These qualitative risk factors include:

1. Lending policies and procedures, including underwriting standards and collection, charge-off and recovery practices.

2. Effect of external factors, such as legal and regulatory requirements.

3. National, regional, and local economic and business conditions as well as the condition of various market segments, including the value of underlying collateral for collateral dependent loans.

4. Nature and volume of the portfolio including growth.

5. Experience, ability, and depth of lending management and staff.

6. Volume and severity of past due, classified and nonaccrual loans.

7. Quality of the Company’s loan review system, and the degree of oversight by the Company’s Board of Directors.

8. Existence and effect of any concentrations of credit and changes in the level of such concentrations.

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation.

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

Management emphasizes loan quality and close monitoring of potential problem credits. Credit risk identification and review processes are utilized in order to assess and monitor the degree of risk in the loan portfolio. QNB’s lending and credit administration staff are charged with reviewing the loan portfolio and identifying changes in the economy or in a borrower’s circumstances which may affect the ability to repay debt or the value of pledged collateral. A loan classification and review system exists that identifies those loans with a higher than normal risk of uncollectibility. Each commercial loan is assigned a grade based upon an assessment of the borrower’s financial capacity to service the debt and the presence and value of collateral for the loan. An independent loan review group tests risk assessments and evaluates the adequacy of the allowance for loan losses. Management meets monthly to review the credit quality of the loan portfolio and quarterly to review the allowance for loan losses.

In addition, various regulatory agencies, as an integral part of their examination process, periodically review QNB’s allowance for loan losses. Such agencies may require QNB to recognize additions to the allowance based on their judgments using information available to them at the time of their examination.

Management believes that it uses the best information available to make determinations about the adequacy of the allowance and that it has established its existing allowance for loan losses in accordance with GAAP. If circumstances differ substantially from the assumptions used in making determinations, future adjustments to the allowance for loan losses may be necessary and results of operations could be affected. Because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that increases to the allowance will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above.

Major classes of loans are as follows:

	June 30, 2013		December 31, 2012
Commercial:
Commercial and industrial	$	111,619	$	100,063
Construction		10,557		11,061
Secured by commercial real estate		192,689		192,867
Secured by residential real estate		44,102		41,003
State and political subdivisions		32,552		34,256
Loans to depository institutions		2,250		3,250
Indirect lease financing		8,703		9,685
Retail:
1-4 family residential mortgages		27,774		28,733
Home equity loans and lines		56,777		54,860
Consumer		2,186		2,012
Total loans		489,209		477,790
Net unearned costs (fees)		6		(57	)
Loans receivable	$	489,215	$	477,733

Loans secured by commercial real estate include all loans collateralized at least in part by commercial real estate. These loans may not be for the expressed purpose of conducting commercial real estate transactions.

Overdrafts are reclassified as loans and are included in consumer loans above and total loans on the balance sheet. At June 30, 2013 and December 31, 2012, overdrafts were approximately $83,000 and $103,000, respectively.

QNB generally lends in its trade area which is comprised of Quakertown and the surrounding communities. To a large extent, QNB makes loans collateralized at least in part by real estate. Its lending activities could be affected by changes in the general economy, the regional economy, or real estate values. Other than disclosed in the table above, at June 30, 2013, there were no concentrations of loans exceeding 10% of total loans.

The Company engages in a variety of lending activities, including commercial, residential real estate and consumer transactions. The Company focuses its lending activities on individuals, professionals and small to medium sized businesses. Risks associated with lending activities include economic conditions and changes in interest rates, which can adversely impact both the ability of borrowers to repay their loans and the value of the associated collateral.

Commercial and industrial loans, commercial real estate loans, construction loans and residential real estate loans with a business purpose are generally perceived as having more risk of default than residential real estate loans with a personal purpose and consumer loans. These types of loans involve larger loan balances to a single borrower or groups of related borrowers and are more susceptible to a risk of loss during a downturn in the business cycle. These loans may involve greater risk because the availability of funds to repay these loans depends on the successful operation of the borrower’s business. The assets financed are used within the business for its ongoing operation. Repayment of these kinds of loans generally comes from the cash flow of the business or the ongoing conversions of assets, such as accounts receivable and inventory, to cash. Typical collateral for commercial and industrial loans includes the borrower’s accounts receivable, inventory and machinery and equipment. Commercial real estate and residential real estate loans secured for a business purpose are originated primarily within the eastern Pennsylvania market area at conservative loan-to-value ratios and often backed by the individual guarantees of the borrowers or owners. Repayment of this kind of loan is dependent upon either the ongoing cash flow of the borrowing entity or the resale of or lease of the subject property. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, as well as the factors affecting residential real estate borrowers.

Loans to state and political subdivisions are tax-exempt or taxable loans to municipalities, school districts and housing and industrial development authorities. These loans can be general obligations of the municipality or school district repaid through their taxing authority, revenue obligations repaid through the income generated by the operations of the authority, such as a water or sewer authority, or loans issued to a housing and industrial development agency, for which a private corporation is responsible for payments on the loans.

Loans to depository institutions consist of a loan to a commercial bank in Lehigh County, Pennsylvania. This loan is secured by shares of common stock of the borrowing institution.

Indirect lease financing receivables represent loans to small businesses that are collateralized by equipment. These loans tend to have higher risk characteristics but generally provide higher rates of return. These loans are originated by a third party and purchased by QNB based on criteria specified by QNB. The criteria include minimum credit scores of the borrower, term of the lease, type and age of equipment financed and geographic area. The geographic area primarily represents states contiguous to Pennsylvania. QNB is not the lessor and does not service these loans.

The Company originates fixed-rate and adjustable-rate real estate-residential mortgage loans for personal purposes that are secured by first liens on the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the credit worthiness of the borrower, including debt-to-income ratios, credit scores and adherence to underwriting policies that emphasize conservative loan-to-value ratios of generally no more than 80%. Residential mortgage loans granted in excess of the 80% loan-to-value ratio criterion are generally insured by private mortgage insurance.

The real estate-home equity portfolio consists of fixed-rate home equity loans and variable-rate home equity lines of credit. Risks associated with loans secured by residential properties are generally lower than commercial loans and include general economic risks, such as the strength of the job market, employment stability and the strength of the housing market. Since most loans are secured by a primary or secondary residence, the borrower’s continued employment is the greatest risk to repayment.

The Company offers a variety of loans to individuals for personal and household purposes. Consumer loans are generally considered to have greater risk than first or second mortgages on real estate because they may be unsecured, or, if they are secured, the value of the collateral may be difficult to assess and is more likely to decrease in value than real estate.

Credit risk in this portfolio is controlled by conservative underwriting standards that consider debt-to-income levels and the creditworthiness of the borrower and, if secured, collateral values.

The Company employs an eight (8) grade risk rating system related to the credit quality of commercial loans, loans to state and political subdivisions and indirect lease financing of which the first four categories are pass categories (credits not adversely rated). The following is a description of the internal risk ratings and the likelihood of loss related to each risk rating.

1 - Excellent - no apparent risk

2 - Good - minimal risk

3 - Acceptable - average risk

4 - Watch List - greater than average risk

5 - Special Mention - potential weaknesses

6 - Substandard - well defined weaknesses

7 - Doubtful - full collection unlikely

8 - Loss - considered uncollectible

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential problem loans. Each loan officer assigns a rating to all loans in the portfolio at the time the loan is originated. Loans with risk ratings of one through three are reviewed annually based on the borrower’s fiscal year. Loans with risk ratings of four are reviewed every six to twelve months based on the dollar amount of the relationship with the borrower. Loans with risk ratings of five through eight are reviewed at least quarterly, and as often as monthly, at management’s discretion. The Company also utilizes an outside loan review firm to review the portfolio on a semi-annual basis to provide the Board of Directors and senior management an independent review of the Bank’s loan portfolio on an ongoing basis. These reviews are designed to recognize deteriorating credits in their earliest stages in an effort to reduce and control risk in the lending function as well as identifying potential shifts in the quality of the loan portfolio. The examinations by the outside loan review firm include the review of lending activities with respect to underwriting and processing new loans, monitoring the risk of existing loans and to provide timely follow-up and corrective action for loans showing signs of deterioration in quality. In addition, the outside firm reviews the methodology for the allowance for loan losses to determine compliance to policy and regulatory guidance.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2013 and December 31, 2012:

June 30, 2013	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	104,329	$	1,363	$	5,927	$	-	$	111,619
Construction		7,572		920		2,065		-		10,557
Secured by commercial real estate		161,592		4,118		26,979		-		192,689
Secured by residential real estate		39,413		27		4,662		-		44,102
State and political subdivisions		30,239		-		2,313		-		32,552
Loans to depository institutions		2,250		-		-		-		2,250
Indirect lease financing		8,471		-		232		-		8,703
	$	353,866	$	6,428	$	42,178	$	-	$	402,472

December 31, 2012	Pass		Special mention		Substandard		Doubtful		Total
Commercial:
Commercial and industrial	$	88,427	$	3,843	$	7,763	$	30	$	100,063
Construction		5,558		1,513		3,990		-		11,061
Secured by commercial real estate		157,678		7,493		27,696		-		192,867
Secured by residential real estate		36,078		1,199		3,726		-		41,003
State and political subdivisions		32,303		-		1,953		-		34,256
Loans to depository institutions		3,250		-		-		-		3,250
Indirect lease financing		9,329		-		356		-		9,685
	$	332,623	$	14,048	$	45,484	$	30	$	392,185

For retail loans, the Company evaluates credit quality based on the performance of the individual credits. The following tables present the recorded investment in the retail classes of the loan portfolio based on payment activity as of June 30, 2013 and December 31, 2012:

June 30, 2013	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	27,454	$	320	$	27,774
Home equity loans and lines		56,538		239		56,777
Consumer		2,186		-		2,186
	$	86,178	$	559	$	86,737

December 31, 2012	Performing		Non- performing		Total
Retail:
1-4 family residential mortgages	$	28,398	$	335	$	28,733
Home equity loans and lines		54,514		346		54,860
Consumer		2,012		-		2,012
	$	84,924	$	681	$	85,605

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of June 30, 2013 and December 31, 2012:

June 30, 2013	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	306	$	37		-	$	343	$	111,276	$	111,619
Construction		-		-		-		-		10,557		10,557
Secured by commercial real estate		244		440	$	4,332		5,016		187,673		192,689
Secured by residential real estate		1,401		537		-		1,938		42,164		44,102
State and political subdivisions		27		-		425		452		32,100		32,552
Loans to depository institutions		-		-		-		-		2,250		2,250
Indirect lease financing		50		52		32		134		8,569		8,703
Retail:
1-4 family residential mortgages		-		-		153		153		27,621		27,774
Home equity loans and lines		117		91		28		236		56,541		56,777
Consumer		28		6		-		34		2,152		2,186
	$	2,173	$	1,163	$	4,970	$	8,306	$	480,903	$	489,209

December 31, 2012	30-59 days past due		60-89 days past due		90 days or more past due		Total past due loans		Current		Total loans receivable
Commercial:
Commercial and industrial	$	76		-		-	$	76	$	99,987	$	100,063
Construction		-		-		-		-		11,061		11,061
Secured by commercial real estate		407	$	1,460	$	3,097		4,964		187,903		192,867
Secured by residential real estate		44		523		293		860		40,143		41,003
State and political subdivisions		71		1		-		72		34,184		34,256
Loans to depository institutions		-		-		-		-		3,250		3,250
Indirect lease financing		344		80		35		459		9,226		9,685
Retail:
1-4 family residential mortgages		-		197		-		197		28,536		28,733
Home equity loans and lines		152		153		197		502		54,358		54,860
Consumer		33		11		-		44		1,968		2,012
	$	1,127	$	2,425	$	3,622	$	7,174	$	470,616	$	477,790

The following tables disclose the recorded investment in loans receivable that are either on non-accrual status or past due 90 days or more and still accruing interest as of June 30, 2013 and December 31, 2012:

June 30, 2013	90 days or more past  due (still accruing)		Non-accrual
Commercial:
Commercial and industrial		-	$	5,535
Construction		-		2,029
Secured by commercial real estate		-		6,408
Secured by residential real estate		-		2,698
State and political subdivisions	$	425		-
Loans to depository institutions		-		-
Indirect lease financing		17		72
Retail:
1-4 family residential mortgages		-		320
Home equity loans and lines		-		239
Consumer		-		-
	$	442	$	17,301

December 31, 2012	90 days or more past due (still accruing)		Non-accrual
Commercial:
Commercial and industrial	$	-	$	6,174
Construction		-		2,480
Secured by commercial real estate		-		6,748
Secured by residential real estate		-		2,390
State and political subdivisions		-		1
Loans to depository institutions		-		-
Indirect lease financing		-		98
Retail:
1-4 family residential mortgages		-		335
Home equity loans and lines		-		346
Consumer		-		-
	$	-	$	18,572

Activity in the allowance for loan losses for the three months ended June 30, 2013 and 2012 are as follows:

Three months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,314	$	(328	)		-		$	8	$	1,994
Construction		230		12			-			-		242
Secured by commercial real estate		3,873		42			-			1		3,916
Secured by residential real estate		1,146		246			-			45		1,437
State and political subdivisions		257		20			-			-		277
Loans to depository institutions		10		-			-			-		10
Indirect lease financing		179		(29	)		-			6		156
Retail:
1-4 family residential mortgages		300		(11	)		-			-		289
Home equity loans and lines		714		24		$	(79	)		5		664
Consumer		29		5			(13	)		7		28
Unallocated		299		119		N/A			N/A			418
	$	9,351	$	100		$	(92	)	$	72	$	9,431

Three months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	3,317	$	164		$	(74	)	$	60	$	3,467
Construction		333		20			-			-		353
Secured by commercial real estate		3,126		2			-			62		3,190
Secured by residential real estate		773		88			(50	)		-		811
State and political subdivisions		301		(79	)		-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		238		21			(13	)		22		268
Retail:
1-4 family residential mortgages		303		(5	)		-			2		300
Home equity loans and lines		547		37			(1	)		12		595
Consumer		17		10			(11	)		2		18
Unallocated		481		(258	)	N/A			N/A			223
	$	9,456	$	-		$	(149	)	$	160	$	9,467

Activity in the allowance for loan losses for the six months ended June 30, 2013 and 2012 are as follows:

Six months ended June 30, 2013	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,505	$	(526	)		-		$	15	$	1,994
Construction		209		33			-			-		242
Secured by commercial real estate		3,795		120			-			1		3,916
Secured by residential real estate		1,230		498		$	(336	)		45		1,437
State and political subdivisions		260		17			-			-		277
Loans to depository institutions		15		(5	)		-			-		10
Indirect lease financing		168		(27	)		(1	)		16		156
Retail:
1-4 family residential mortgages		324		(35	)		-			-		289
Home equity loans and lines		582		248			(172	)		6		664
Consumer		27		16			(34	)		19		28
Unallocated		657		(239	)	N/A			N/A			418
	$	9,772	$	100		$	(543	)	$	102	$	9,431

Six months ended June 30, 2012	Balance, beginning of period		Provision for (credit to) loan losses			Charge-offs			Recoveries		Balance, end of period
Commercial:
Commercial and industrial	$	2,959	$	520		$	(74	)	$	62	$	3,467
Construction		556		(203	)		-			-		353
Secured by commercial real estate		3,124		4			-			62		3,190
Secured by residential real estate		746		151			(86	)		-		811
State and political subdivisions		195		27			-			-		222
Loans to depository institutions		20		-			-			-		20
Indirect lease financing		312		(47	)		(23	)		26		268
Retail:
1-4 family residential mortgages		249		70			(21	)		2		300
Home equity loans and lines		625		(23	)		(19	)		12		595
Consumer		20		13			(20	)		5		18
Unallocated		435		(212	)	N/A			N/A			223
	$	9,241	$	300		$	(243	)	$	169	$	9,467

As previously discussed, the Company maintains a loan review system, which includes a continuous review of the loan portfolio by internal and external parties to aid in the early identification of potential impaired loans. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for

commercial loans, loans to state and political subdivisions and indirect lease financing loans by using either the present value of expected future cash flows discounted at the loan’s effective interest rate or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

An allowance for loan losses is established for an impaired loan if its carrying value exceeds its estimated fair value. The estimated fair values of the majority of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral.

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets.

From time to time, QNB may extend, restructure, or otherwise modify the terms of existing loans, on a case-by-case basis, to remain competitive and retain certain customers, as well as assist other customers that may be experiencing financial difficulties. A loan is considered to be a troubled debt restructuring (“TDR”) loan when the Company grants a concession to the borrower because of the borrower’s financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates to less than the current market rate for new obligations with similar risk. Loans classified as TDRs are considered non-performing and are also designated as impaired.

The concessions made for TDRs involve lowering the monthly payments on loans through periods of interest only payments, a reduction in interest rate below a market rate or an extension of the term of the loan without a corresponding adjustment to the risk premium reflected in the interest rate, or a combination of these three methods. The restructurings rarely result in the forgiveness of principal or accrued interest. If the borrower has demonstrated performance under the previous terms and our underwriting process shows the borrower has the capacity to continue to perform under the restructured terms, the loan will continue to accrue interest. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

QNB assesses all loan restructurings under the guidance of ASU 2011-02. Performing TDRs (not reported as non-accrual or past due 90 days or more and still accruing) totaled $4,294,000 and $2,578,000 as of June 30, 2013 and December 31, 2012, respectively. Non-performing TDRs totaled $3,234,000 and $3,299,000 as of June 30, 2013 and December 31, 2012, respectively. All TDRs are included in impaired loans presented in the section above.

The following table presents loans by loan class modified as TDRs during the three and six months ended June 30, 2013 and 2012. The pre-modification and post-modification outstanding recorded investments disclosed in the tables below, represent carrying amounts immediately prior to the modification and at June 30, 2013 and 2012.

Three months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		-		-		-		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1	$	28	$	28		-		-		-
		1	$	28	$	28		4	$	3,007	$	2,997

Six months ended June 30,	2013						2012
	Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment		Number of contracts		Pre- modification outstanding recorded investment		Post- modification outstanding recorded investment
Commercial:
Commercial and industrial		-		-		-		2	$	482	$	476
Secured by commercial real estate		1	$	1,822	$	1,822		1		2,380		2,380
Retail:
1-4 family residential mortgages		-		-		-		1		145		141
Home equity loans and lines		1		28		28		1		38		38
		2	$	1,850	$	1,850		5	$	3,045	$	3,035

The TDR concessions made during the six months ended June 30, 2013 involved an interest only repayment period on the loans. There was no specific reserve for loan losses allocated to the loans modified as TDRs during the six months ended June 30, 2013. Any required specific reserves are included in the allowance for loan losses for loans individually evaluated for impairment. There were no charge-offs resulting from loans modified as TDRs during the six months ended June 30, 2013 or 2012.

There were no loans modified as TDRs within 12 months prior to June 30, 2013 for which there was a payment default (30 days or more past due) during the six months ended June 30, 2013.

The following tables present the balance in the allowance for loan losses at June 30, 2013 and December 31, 2012 disaggregated on the basis of the Company’s impairment method by class of loans receivable along with the balance of loans receivable by class, excluding unearned fees and costs, disaggregated on the basis of the Company’s impairment methodology:

	Allowance for Loan Losses						Loans Receivable
June 30, 2013	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	1,994	$	652	$	1,342	$	111,619	$	5,882	$	105,737
Construction		242		-		242		10,557		2,065		8,492
Secured by commercial real estate		3,916		850		3,066		192,689		15,633		177,056
Secured by residential real estate		1,437		534		903		44,102		3,836		40,266
State and political subdivisions		277		-		277		32,552		1,807		30,745
Loans to depository institutions		10		-		10		2,250		-		2,250
Indirect lease financing		156		7		149		8,703		72		8,631
Retail:
1-4 family residential mortgages		289		67		222		27,774		440		27,334
Home equity loans and lines		664		71		593		56,777		267		56,510
Consumer		28		-		28		2,186		-		2,186
Unallocated		418	N/A		N/A		N/A		N/A		N/A
	$	9,431	$	2,181	$	6,832	$	489,209	$	30,002	$	459,207

	Allowance for Loan Losses						Loans Receivable
December 31, 2012	Balance		Balance related to loans individually evaluated for impairment		Balance related to loans collectively evaluated for impairment		Balance		Balance individually evaluated for impairment		Balance collectively evaluated for impairment
Commercial:
Commercial and industrial	$	2,505	$	1,309	$	1,196	$	100,063	$	7,753	$	92,310
Construction		209		-		209		11,061		3,990		7,071
Secured by commercial real estate		3,795		619		3,176		192,867		14,931		177,936
Secured by residential real estate		1,230		543		687		41,003		2,843		38,160
State and political subdivisions		260		-		260		34,256		1,849		32,407
Loans to depository institutions		15		-		15		3,250		-		3,250
Indirect lease financing		168		13		155		9,685		98		9,587
Retail:
1-4 family residential mortgages		324		90		234		28,733		456		28,277
Home equity loans and lines		582		127		455		54,860		384		54,476
Consumer		27		-		27		2,012		-		2,012
Unallocated		657	N/A		N/A		N/A		N/A		N/A
	$	9,772	$	2,701	$	6,414	$	477,790	$	32,304	$	445,486

The following tables summarize additional information in regards to impaired loans by loan portfolio class as of June 30, 2013 and December 31, 2012:

June 30, 2013	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	4,153	$	4,548	$	-
Construction		2,065		2,302		-
Secured by commercial real estate		12,339		13,184		-
Secured by residential real estate		1,444		1,467		-
State and political subdivisions		1,807		1,807		-
Loans to depository institutions		-		-		-
Indirect lease financing		39		44		-
Retail:
1-4 family residential mortgages		166		187		-
Home equity loans and lines		196		222		-
Consumer		-		-		-
	$	22,209	$	23,761	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	1,729	$	1,902	$	652
Construction		-		-		-
Secured by commercial real estate		3,294		3,799		850
Secured by residential real estate		2,392		2,512		534
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		33		35		7
Retail:
1-4 family residential mortgages		274		285		67
Home equity loans and lines		71		79		71
Consumer		-		-		-
	$	7,793	$	8,612	$	2,181
Total:
Commercial:
Commercial and industrial	$	5,882	$	6,450	$	652	$	6,771	$	12
Construction		2,065		2,302		-		3,865		28
Secured by commercial real estate		15,633		16,983		850		14,117		197
Secured by residential real estate		3,836		3,979		534		2,811		17
State and political subdivisions		1,807		1,807		-		1,826		33
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		72		79		7		78		-
Retail:
1-4 family residential mortgages		440		472		67		448		3
Home equity loans and lines		267		301		71		323		1
Consumer		-		-		-		-		-
	$	30,002	$	32,373	$	2,181	$	30,239	$	291

December 31, 2012	Recorded investment (after charge-offs)		Unpaid principal balance		Related allowance		Average recorded investment		Interest income recognized
With no specific allowance recorded:
Commercial:
Commercial and industrial	$	5,241	$	5,477	$	-
Construction		3,990		4,170		-
Secured by commercial real estate		11,392		12,128		-
Secured by residential real estate		897		912		-
State and political subdivisions		1,849		1,850		-
Loans to depository institutions		-		-		-
Indirect lease financing		37		44		-
Retail:
1-4 family residential mortgages		181		198		-
Home equity loans and lines		184		196		-
Consumer		-		-		-
	$	23,771	$	24,975	$	-
With an allowance recorded:
Commercial:
Commercial and industrial	$	2,512	$	2,687	$	1,309
Construction		-		-		-
Secured by commercial real estate		3,539		4,023		619
Secured by residential real estate		1,946		2,024		543
State and political subdivisions		-		-		-
Loans to depository institutions		-		-		-
Indirect lease financing		61		67		13
Retail:
1-4 family residential mortgages		275		287		90
Home equity loans and lines		200		214		127
Consumer		-		-		-
	$	8,533	$	9,302	$	2,701
Total:
Commercial:
Commercial and industrial	$	7,753	$	8,164	$	1,309	$	7,657	$	74
Construction		3,990		4,170		-		4,972		111
Secured by commercial real estate		14,931		16,151		619		14,883		541
Secured by residential real estate		2,843		2,936		543		2,439		47
State and political subdivisions		1,849		1,850		-		1,478		64
Loans to depository institutions		-		-		-		-		-
Indirect lease financing		98		111		13		86		-
Retail:
1-4 family residential mortgages		456		485		90		518		5
Home equity loans and lines		384		410		127		510		5
Consumer		-		-
	$	32,304	$	34,277	$	2,701	$	32,543	$	847