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Loans and Allowance for Loan and Lease Losses

9 Months Ended

Sep. 30, 2012

Loans and Allowance for Loan and Lease Losses [Abstract]

LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

NOTE E— LOANS AND ALLOWANCE FOR LOAN AND LEASE LOSSES

(Dollars in Thousands)


	*At September 30,*		At December 31,
	2012		2011
Real estate loans:
Commercial	$	103,428	$	100,126
Residential		164,879		164,420
Construction		15,717		17,980
Commercial loans and leases		26,522		30,961
Municipal loans		1,179		740
Consumer loans		2,343		2,860

Total loans		314,068		317,087

Less:
Undisbursed loan proceeds		220		12
Deferred loan fees, net		684		434
Allowance for loan losses		4,236		4,132

		5,140		4,578

Total loans—net	$	308,928	$	312,509

The risk characteristics of each loan portfolio segment are as follows:

Commercial Real Estate: These loans are viewed primarily as cash flow loans and secondarily as loans secured by real estate. Commercial real estate lending typically involves higher loan principal amounts and the repayment of these loans is generally dependent on the successful operation of the property securing the loan or the business conducted on the property securing the loan. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. The properties securing the Bank’s commercial real estate portfolio are diverse in terms of type and geographic location. Management monitors and evaluates commercial real estate loans based on collateral and risk grade criteria. As a general rule, the Bank avoids financing single purpose projects unless other underwriting factors are present to help mitigate risk. In addition, management tracks the level of owner-occupied commercial real estate loans versus non-owner occupied loans.

Construction Real Estate: Construction loans are underwritten utilizing feasibility studies, independent appraisal reviews, sensitivity analysis of absorption and lease rates and financial analysis of the developers and property owners. Construction loans are generally based on estimates of costs and value associated with the completed project. These estimates may be inaccurate. Construction loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project. Sources of repayment for these types of loans may be pre-committed permanent loans from approved long-term lenders, sales of developed property or an interim loan commitment from the Bank until permanent financing is obtained. These loans are closely monitored by on-site inspections and are considered to have higher risks than other real estate loans due to their ultimate repayment being sensitive to interest rate changes, timely completion and sale of the property, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Commercial Loans and Leases: Commercial loans and leases are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. The cash flows of borrowers, however, may not be as expected and the collateral securing these loans may fluctuate in value. Most commercial loans are secured by the assets being financed or other business assets such as accounts receivable or inventory and may incorporate a personal guarantee; however, some short-term loans may be made on an unsecured basis. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers.

Residential and Consumer: With respect to residential loans that are secured by one-to four-family residences and are generally owner occupied, the Bank generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to four-family residences, and consumer loans are secured by consumer assets such as automobiles or recreational vehicles. Some consumer loans are unsecured such as small installment loans and certain lines of credit. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

Municipal: Municipal loans are primarily based on the identified cash flows of the borrower and secondarily on the underlying collateral provided by the borrower. Most municipal loans are secured by the full faith and credit of the municipality. The availability of funds for the repayment of these loans may be substantially dependent on the ability of the municipality to collect taxes or other revenue.

Allowance for Loan and Lease Losses Methodology:

Bank policy is designed to ensure that an adequate allowance for loan and lease losses (“ALLL”) will be maintained. Primary responsibility for ensuring that the Bank has processes in place to consistently assess the adequacy of the ALLL rests with the Board. The Board has charged the Chief Credit Officer (“CCO”) with responsibility for establishing the methodology to be used and to assess the adequacy of the ALLL quarterly. The methodology will be reviewed and affirmed by the Loan Review Officer. Quarterly the Board will review recommendations from the CCO to adjust the allowance as appropriate.

The methodology employed by the CCO for each portfolio segment will at a minimum contain the following:

Loans will be segmented by type of loan.

Loans will be further segmented by risk grades.

The required ALLL for types of performing homogeneous loans which do not have a specific reserve will be determined by applying a factor based on historical losses averaged over the twelve quarters prior to the most recent quarter. In those instances, where the Bank’s historical experience is not available, the CCO will develop factors based on industry experience and best practices.

All criticized and classified loans will be tested for impairment by applying one of three methodologies:

a. Present value of future cash flows;

b. Fair value of collateral less cost to sell; or

c. The loan’s observable market price

All troubled debt restructurings (“TDR”) are considered impaired loans.

Loans tested for impairment will be removed from other pools to prevent layering (double-counting).

The required ALLL for each group of loans will be added together to determine the total required ALLL for the Bank. The required ALLL will be compared to the current ALLL to determine the required provision to increase the ALLL or credit to decrease the ALLL.

The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Bank over the twelve quarters prior to the most recent quarter. Management believes the historical loss experience methodology is appropriate in the current economic environment, as it captures loss rates that are comparable to the current period being analyzed.

We also factor in the following qualitative considerations:

Changes in policies and procedures;

Changes in national, regional and local economic and business conditions;

Changes in the composition and size of the portfolio and in the terms of loans;

Changes in the experience, ability and depth of lending management and other relevant staff;

Changes in the volume and severity of past due loans, the volume of non-accrual loans, and the volume and severity of adversely classified or graded loans;

Changes in the quality of the Bank’s loan review system;

Changes in the value of underlying collateral for collateral-dependent loans;

The existence and effect of any concentration of credit, and changes in the level of such concentrations; and

The effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the existing portfolio.

The following table presents the balance and activity in allowance for loan losses as of September 30, 2012 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended September 30, 2012


	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans		Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	773		$	1,418		$	954	$	847		$	—	$	111		$	4,103
Provision (credit) for losses		(234	)		165			57		253			—		14			255
Charge-offs (1)		—			(50	)		—		(65	)		—		(18	)		(133	)
Recoveries		—			2			1		1			—		7			11

Balance at end of quarter	$	539		$	1,535		$	1,012	$	1,036		$	—	$	114		$	4,236

The following table presents the balance and activity in allowance for loan losses and the recorded investment in loans and impairment methods as of September 30, 2012 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Nine Months Ended September 30, 2012


	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of year	$	584		$	1,539		$	1,150		$	760		$	—	$	99		$	4,132
Provision for losses		8			356			51			427			—		48			890
Charge-offs (1)		(53	)		(367	)		(196	)		(154	)		—		(52	)		(822	)
Recoveries		—			7			7			3			—		19			36

Balance at end of period	$	539		$	1,535		$	1,012		$	1,036		$	—	$	114		$	4,236

Ending allowance balance:
Individually evaluated for impairment	$	426		$	462		$	334		$	453		$	—	$	15		$	1,690
Collectively evaluated for impairment		113			1,073			678			583			—		99			2,546

Total	$	539		$	1,535		$	1,012		$	1,036		$	—	$	114		$	4,236

Ending loan balance:
Individually evaluated for impairment	$	5,819		$	6,675		$	4,887		$	1,242		$	—	$	49		$	18,672
Collectively evaluated for impairment		97,609			158,204			10,830			25,280			1,179		2,294			295,396

Total	$	103,428		$	164,879		$	15,717		$	26,522		$	1,179	$	2,343		$	314,068

The following tables present the balance and activity in allowance for loan losses as of September 30, 2011 (dollars in thousands):

Allowance for Loan Losses

For Three Months Ended September 30, 2011


	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases			Municipal Loans		Consumer Loans			Total
Balance at beginning of quarter	$	674		$	1,693		$	859		$	824			—	$	69		$	4,119
Provision (credit) for losses		66			56			179			(54	)		—		8			255
Charge-offs (1)		(10	)		(107	)		(13	)		—			—		(21	)		(151	)
Recoveries		—			2			—			—			—		4			6

Balance at end of quarter	$	730		$	1,644		$	1,025		$	770			—	$	60		$	4,229

Allowance for Loan Losses

For Nine Months Ended September 30, 2011


	Commercial Real Estate Loans			Residential Real Estate Loans			Construction Real Estate Loans			Commercial Loans and Leases		Municipal Loans		Consumer Loans			Total
Balance at beginning of year	$	639		$	1,584		$	1,254		$	657		—	$	78		$	4,212
Provision for losses		101			329			306			112		—		22			870
Charge-offs (1)		(11	)		(298	)		(535	)		—		—		(52	)		(896	)
Recoveries		1			29			—			1		—		12			43

Balance at end of period	$	730		$	1,644		$	1,025		$	770		—	$	60		$	4,229

The following table presents the balance in allowance for loan losses and the recorded investment in loans and impairment methods as of December 31, 2011 (dollars in thousands):

Allowance for Loan Losses and Recorded Investment in Loans

For Year Ended December 31, 2011


	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Ending allowance balance:
Individually evaluated for impairment	$	445	$	707	$	435	$	142	$	—	$	8	$	1,737
Collectively evaluated for impairment		139		832		715		618		—		91		2,395

Total	$	584	$	1,539	$	1,150	$	760		—	$	99	$	4,132

Ending loan balance:
Individually evaluated for impairment	$	4,891	$	6,440	$	3,672	$	935	$	—	$	44	$	15,982
Collectively evaluated for impairment		95,235		157,980		14,308		30,026		740		2,816		301,105

Total	$	100,126	$	164,420	$	17,980	$	30,961	$	740	$	2,860	$	317,087

(1) Policy for Charging Off Loans:

A loan should be charged off at any point in time when it no longer can be considered a bankable asset, meaning collectable within the parameters of policy. The Bank shall not renew any loan, or put a loan on a demand basis, only to defer a problem, nor is it appropriate to attempt long-term recoveries while reporting loans as assets. An unsecured loan generally should be charged off no later than when it is 120 days past due as to principal or interest. For loans in the legal process of foreclosure against collateral of real and/or liquid value, the 120-day rule does not apply. Such charge-offs can be deferred until the foreclosure process progresses to the point where the Bank can adequately determine whether or not any ultimate loss will result. In similar instances where other legal actions will cause extraordinary delays, such as the settlement of an estate, yet collateral of value is realizable, the 120-day period could be extended. When a loan is unsecured or not fully collateralized, the loan should be charged off or written down to the documented collateral value rather than merely being placed on non-accrual status.

All charge-offs and forgiveness of debt greater than $50,000 must be approved by the Loan Committee upon recommendation by the CCO. The Loan Committee consists of the Bank’s Chief Executive Officer, Chief Risk Officer, Chief Credit Officer, Chief Marketing Officer and Loan Review Officer. Charge-offs between $10,000 and $50,000 must be approved by the CCO. Decisions to defer the charge-off of a loan must be approved by the CCO.

Narrative Description of Borrower Rating:

Grade 1 — Highest Quality (Pass)

This loan represents a credit extension of the highest quality. The borrower’s historic (at least five years) cash flows manifest extremely large and stable margins of coverage. Balance sheets are conservative, well capitalized, and liquid. After considering debt service for proposed and existing debt, projected cash flows continue to be strong and provide ample coverage. The borrower typically reflects broad geographic and product diversification and has broad access to alternative financial markets. Also included in this category may be loans secured by U.S. government securities, U.S. government agencies, highly rated municipal bonds, insured savings accounts, and insured certificates of deposit drawn on high quality banks.

Grade 2 — Excellent Quality (Pass)

This loan has a sound primary and secondary source of repayment. The borrower has proven access to alternative sources of financing. This loan carries a low level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are strong. This category also includes loans secured by high quality traded stocks and lower grade municipal bonds (must still be investment grade).

Grade 3 — Good Quality (Pass)

This loan has a sound primary source of repayment. The borrower may have access to alternative sources of financing, but sources are not as widely available as they are to a higher graded borrower. This loan carries a normal level of risk, with minimal loss exposure. The borrower has the ability to perform according to the terms of the credit facility. The margins of cash flow coverage are satisfactory but vulnerable to more rapid deterioration than the higher quality loans. Real estate loans in this category display advance rates below the suggested maximum, debt coverage well in excess of the suggested level, or are leased beyond the loan term by a “credit” tenant.

Grade 4 — Acceptable Quality (Pass)

The borrower is a reasonable credit risk and demonstrates the ability to repay the debt from normal business operations. Risk factors may include reliability of margins and cash flows, liquidity, dependence on a single product or industry, cyclical trends, depth of management, or limited access to alternative financing sources. Historic financial information may indicate erratic performance, but current trends are positive. Quality of financial information is adequate, but is not as detailed and sophisticated as information found on higher graded loans. If adverse circumstances arise, the impact on the borrower may be significant. All small business loans extended based upon credit scoring should be classified in this category unless deterioration occurs, in which case they should bear one of the below mentioned grades.

Grade 5—Marginal Quality (Pass)

The borrower is an acceptable credit risk and while it can demonstrate it has the ability to repay the debt from normal business operations, the coverage is not as strong as an Acceptable Quality loan. Weakness in one or more areas are defined. Risk factors would typically include a higher leverage position than desirable, low liquidity, weak or sporadic cash flow, the lack of reasonably current and complete financial information, and/or overall financial trends are erratic.

Grade 6 – Elevated Risk, Management Attention (Watch)

While the borrower at origination was not considered a high risk potential, there are characteristics related to the financial condition, and/or a level of concern regarding either or both the primary and secondary source of repayment, that may preclude this from being a pass credit. These credit facilities are considered “pass” credits but exhibit the potential of developing a more serious weakness in their operation going forward. Usually, a credit in this category will be upgraded or downgraded on further analysis within a short period of time.

Grade 7 — Special Mention

These credit facilities have developing weaknesses that deserve extra attention from the loan officer and other management personnel. If the developing weakness is not corrected or mitigated, there may be deterioration in the ability of the borrower to repay the Bank’s debt in the future. This grade should not be assigned to loans which bear certain peculiar risks normally associated with the type of financing involved, unless circumstances have caused the risk to increase to a level higher than would have been acceptable when the credit was originally approved. Loans where actual, not potential, weaknesses or problems are clearly evident and significant should generally be graded in one of the grade categories below.

Grade 8 — Substandard

Loans and other credit extensions bearing this grade are considered to be inadequately protected by the current sound worth and debt service capacity of the borrower or of any pledged collateral. These obligations, even if apparently protected by collateral value, have well-defined weaknesses related to adverse financial, managerial, economic, market, or political conditions which have clearly jeopardized repayment of principal and interest as originally intended. Furthermore, there is the possibility that some future loss will be sustained by the Bank if such weaknesses are not corrected. Clear loss potential, however, does not have to exist in any individual assets classified as substandard.

Grade 9 — Doubtful

Loans and other credit extensions graded “9” have all the weaknesses inherent in those graded “8,” with the added characteristic that the severity of the weaknesses make collection or liquidation in full highly questionable or improbable based upon currently existing facts, conditions, and values. The probability of some loss is extremely high, but because of certain important and reasonably specific factors, the amount of loss cannot be determined. Such pending factors could include merger or liquidation, additional capital injection, refinancing plans, or perfection of liens on additional collateral. Loans in this classification should be placed in nonaccrual status, with collections applied to principal on the Bank’s books.

Grade 10 — Loss

Loans in this classification are considered uncollectible and cannot be justified as a viable asset of the Bank. This classification does not mean the loan has absolutely no recovery value, but that it is neither practical nor desirable to defer writing off this loan even though partial recovery may be obtained in the future.

The following tables present the credit risk profile of the Company’s loan portfolio based on rating category and payment activity as of September 30, 2012 and December 31, 2011 (dollars in thousands):

Loan Portfolio Quality Indicators

At September 30, 2012


	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Rating:
Pass (Grades 1-5)	$	86,915	$	158,121	$	10,830	$	25,110	$	1,179	$	2,294	$	284,449
Watch (Grade 6)		4,660		83		—		16		—		—		4,759
Special Mention (Grade 7)		6,034		—		—		154		—		—		6,188
Substandard (Grade 8)		5,198		2,672		2,345		89		—		—		10,304
Doubtful (Grade 9)		621		4,003		2,542		1,153		—		49		8,368
Loss (Grade 10)		—		—		—		—		—		—		—

Total	$	103,428	$	164,879	$	15,717	$	26,522	$	1,179	$	2,343	$	314,068

Loan Portfolio Quality Indicators

At December 31, 2011


	Commercial Real Estate Loans		Residential Real Estate Loans		Construction Real Estate Loans		Commercial Loans and Leases		Municipal Loans		Consumer Loans		Total
Rating:
Pass (Grades 1-5)	$	82,701	$	156,783	$	12,204	$	28,513	$	740	$	2,860	$	283,801
Watch (Grade 6)		7,257		1,100		2,210		1,200		—		—		11,767
Special Mention (Grade 7)		5,037		90		135		318		—		—		5,580
Substandard (Grade 8)		5,131		1,940		—		286		—		—		7,357
Doubtful (Grade 9)		—		4,507		3,431		644		—		—		8,582
Loss (Grade 10)		—		—		—		—		—		—		—

Total	$	100,126	$	164,420	$	17,980	$	30,961	$	740	$	2,860	$	317,087

For all loan classes, the entire balance of a loan is considered delinquent if the minimum payment contractually required to be made is not received by the specified due date.

The following tables present the Company’s loan portfolio aging analysis as of September 30, 2012 and December 31, 2011 (dollars in thousands):

Loan Portfolio Aging Analysis

At September 30, 2012


	30-59 Days Past Due (A)		60-89 Days Past Due		90 Days and Greater		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
Real estate loans:
Commercial	$	270	$	—	$	443	$	713	$	102,715	$	103,428	$	—
Residential		3,415		458		3,008		6,881		157,998		164,879		233
Construction		2,120		—		284		2,404		13,313		15,717		—
Commercial loans and leases		281		—		780		1,061		25,461		26,522		—
Municipal loans		—		—		—		—		1,179		1,179		—
Consumer loans		33		3		—		36		2,307		2,343		—

Total	$	6,119	$	461	$	4,515	$	11,095	$	302,973	$	314,068	$	233

(A)	Includes $3,602,000 in loans classified as nonaccrual that are less than 30 days past due, of which $2,120,000 are construction loans, $1,195,000 are residential real estate loans, $280,000 are commercial loans, $7,000 are commercial real estate loans and $8,000 are consumer loans.

Loan Portfolio Aging Analysis

At December 31, 2011


	30-59 Days Past Due (A)		60-89 Days Past Due (B)		90 Days and Greater		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 days & Accruing
Real estate loans:
Commercial	$	—	$	—	$	—	$	—	$	100,126	$	100,126	$	—
Residential		1,204		417		4,398		6,019		158,401		164,420		243
Construction		4,908		—		1,126		6,034		11,946		17,980		—
Commercial loans and leases		434		554		219		1,207		29,754		30,961		—
Municipal loans		—		—		—		—		740		740		—
Consumer loans		8		2		9		19		2,841		2,860		9

Total	$	6,554	$	973	$	5,752	$	13,279	$	303,808	$	317,087	$	252

(A)	Includes $3,049,000 in loans classified as nonaccrual that are less than 30 days past due, of which $2,306,000 are construction loans, $425,000 are commercial loans, and $318,000 are residential real estate loans.

(B)	Includes a $27,000 residential real estate loan 68 days delinquent that is classified as non-accrual.

Impaired Loans: For all loan classes, a loan is designated as impaired when, based on current information or events, it is probable that the Bank will be unable to collect all amounts due (principal and interest) according to the contractual terms of the loan agreement. Payments with insignificant delays not exceeding 90 days outstanding are not considered impaired. Certain non-accrual and substantially delinquent loans may be considered to be impaired. Generally, loans are placed on non-accrual status at 90 days past due and accrued interest is reversed against earnings, unless the loan is well-secured and in the process of collection. The accrual of interest on impaired and non-accrual loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due.

For all loan classes, when interest accrual is discontinued all unpaid accrued interest is reversed when considered uncollectible. When a loan is in a non-accrual status, all cash payments of interest are applied to loan principal. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents impaired loans as of September 30, 2012 (dollars in thousands):

Impaired Loans

At September 30, 2012


							Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		N/A		—		—		—		—
Residential		—		—		N/A		—		—		—		—
Construction		—		—		N/A		—		—		—		—
Commercial loans and leases		—		—		N/A		—		—		—		—
Municipal loans		—		—		N/A		—		—		—		—
Consumer loans		—		—		N/A		—		—		—		—

Total		—		—		N/A		—		—		—		—

Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	5,819	$	5,819	$	426	$	5,864	$	51	$	5,497	$	121
Residential		6,675		6,932		462		6,627		19		6,340		59
Construction		4,887		5,142		334		4,838		33		4,220		40
Commercial loans and leases		1,242		1,273		453		1,335		3		1,121		11
Municipal loans		0		0		0		0		0		0		0
Consumer loans		49		49		15		54		0		48		0

Total	$	18,672	$	19,215	$	1,690	$	18,718	$	106	$	17,226	$	231

All Impaired Loans	$	18,672	$	19,215	$	1,690	$	18,718	$	106	$	17,226	$	231

(1)	Includes all loans that were classified as impaired at any time during the three-month and nine-month periods (not just impaired loans at September 30, 2012), and their average balance for only the period during which they were classified as impaired.

(2)	Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three and nine months ended September 30, 2012.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

The following table presents impaired loan activity as of September 30, 2011 (dollars in thousands):

Impaired Loans

At September 30, 2011


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Average Investment in Impaired Loans (1)		Interest Income Recognized (2)		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		—		—
Residential		—		—		—		—
Construction		—		—		—		—
Commercial loans and leases		—		—		—		—
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—

Total		—		—		—		—

Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	4,800	$	93	$	5,462	$	280
Residential		5,922		20		6,099		80
Construction		3,320		25		4,057		54
Commercial loans and leases		973		2		965		11
Municipal loans		—		—		—		—
Consumer loans		48		—		52		—

Total	$	15,063	$	140	$	16,635	$	425

All Impaired Loans	$	15,063	$	140	$	16,635	$	425

(1)	Includes all loans that were classified as impaired at any time during the three-month and nine-month periods (not just impaired loans at September 30, 2011), and their average balance for only the period during which they were classified as impaired.

(2)	Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during the three months and nine months ended September 30, 2011.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

The following table presents impaired loans for the year ended December 31, 2011 (dollars in thousands):

Impaired Loans

At December 31, 2011


							Year Ended December 31, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans (1)		Interest Income Recognized (2)
Loans without a specific valuation allowance:
Real estate loans:
Commercial		—		—		N/A		—		—
Residential		—		—		N/A		—		—
Construction		—		—		N/A		—		—
Commercial loans and leases		—		—		N/A		—		—
Municipal loans		—		—		N/A		—		—
Consumer loans		—		—		N/A		—		—

Total		—		—		N/A		—		—

Loans with a specific valuation allowance:
Real estate loans:
Commercial	$	4,891	$	4,891	$	445	$	5,318	$	181
Residential		6,440		6,494		707		6,142		100
Construction		3,672		3,842		435		3,962		57
Commercial loans and leases		935		955		142		952		16
Municipal loans		—		—		—		—		—
Consumer loans		44		44		8		50		—

Total	$	15,982	$	16,226	$	1,737	$	16,424	$	354

All Impaired Loans	$	15,982	$	16,226	$	1,737	$	16,424	$	354

(1)	Includes all loans that were classified as impaired at any time during 2011 (not just impaired loans at December 31, 2011), and their average balance for only the period during which they were classified as impaired.

(2)	Interest recorded in income during only the period the loans were classified as impaired, for all loans that were classified as impaired at any time during 2011.

For all loan classes, interest income on loans individually classified as impaired is recognized on a cash basis after all past due and current principal payments have been made.

Non-Accrual Loans: Any loan which becomes 90 days delinquent, or has the full collection of principal and interest in doubt, or a portion of principal has been charged off will immediately be placed on non-accrual status. The loan does not have to be placed on non-accrual if the charge-off is part of a Chapter 13 reaffirmation. At the time a loan is placed on non-accrual, all accrued but unpaid interest will be reversed from interest income. Placing the loan on non-accrual does not relieve the borrower of the obligation to repay interest.

For all loan classes, when a loan is in a non-accrual status all cash payments of interest are applied to loan principal.

A loan placed on non-accrual may be restored to accrual status when all delinquent principal and interest has been brought current, and the Bank expects full payment of the remaining contractual principal and interest including any previous charge-offs. The Bank requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status. Should the loan be reinstated to accrual status, all cash payments of interest received while in non-accrual status will be taken into income over the remaining life of the loan using the level yield accounting method.

The following table presents the Company’s non-accrual loans at September 30, 2012 and December 31, 2011 (dollars in thousands):

Loans Accounted for on a Non-Accrual Basis


	*At September 30,* 2012		At December 31, 2011
Real estate loans:
Commercial	$	713	$	—
Residential		4,139		4,500
Construction		2,404		3,432
Commercial loans and leases		1,061		644
Municipal loans		—		—
Consumer loans		7		—

Total	$	8,324	$	8,576

Total non-accrual loans at September 30, 2012 and December 31, 2011 included $2,473,000 and $1,706,000 of TDRs, respectively.

Troubled Debt Restructurings: Our loan and lease portfolio includes certain loans that have been modified as a TDR, where economic concessions have been granted to borrowers who have experienced financial difficulties. These concessions typically result from loss mitigation efforts and could include reductions in the interest rate, payment extensions, forgiveness of principal, forbearance or other actions. Certain TDRs are classified as nonperforming at the time of restructuring and typically are returned to performing status after considering the borrower’s sustained repayment performance for a reasonable period of at least six consecutive months.

When we modify loans and leases as a TDR, we evaluate any possible impairment similar to other impaired loans based on the present value of expected future cash flows, discounted at the contractual interest rate of the original loan or lease agreement, or use the current fair value of the collateral, less selling costs for collateral dependent loans. If we determine that the value of the modified loan is less than the recorded balance of the loan (net of previous charge-offs, deferred loan fees or costs and unamortized premium or discount), impairment is recognized through a specific allowance or charge-off to the allowance. In periods subsequent to modification, we evaluate all TDRs, including those that have payment defaults, for possible impairment and recognize impairment through the allowance.

Loans classified as a TDR during the three and nine-month periods ended September 30, 2012, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.


	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Modifications						Modifications
	Number		Recorded Balance Before		Recorded Balance After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		1	$	31	$	31		2	$	172	$	172
Residential		1		79		79		5		1,712		1,712
Construction		—		—		—		1		1,940		1,940
Commercial loans and leases		1		58		58		2		268		268
Municipal loans		—		—		—		—		—		—
Consumer loans		—		—		—		3		9		9

Total		3	$	168	$	168		13	$	4,101	$	4,101

TDRs that had payment defaults during the three and nine-month periods ended September 30, 2012, segregated by class, are shown in the table below (dollars in thousands). Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.


	Three Months Ended September 30, 2012				Nine Months Ended September 30, 2012
	Number of Defaults		Recorded Balance		Number of Defaults		Recorded Balance
Real estate loans:
Commercial		—	$	—		—	$	—
Residential		—		—		—		—
Construction		—		—		—		—
Commercial loans and leases		—		—		2		123
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—

Total		—	$	—		2	$	123

Loans classified as a TDR during the three and nine month periods ended September 30, 2011, segregated by class, are shown in the table below (dollars in thousands). These modifications consisted primarily of interest rate concessions.


	Three Months Ended September 30, 2011						Nine Months Ended September 30, 2011
	Modifications						Modifications
	Number		Recorded Balance Before		Recorded Balance After		Number		Recorded Balance Before		Recorded Balance After
Real estate loans:
Commercial		1	$	197	$	197		1	$	197	$	197
Residential		2		86		86		13		1,101		1,101
Construction		—		—		—		—		—		—
Commercial loans and leases		1		240		240		1		240		240
Municipal loans		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—

Total		4	$	523	$	523		15	$	1,538	$	1,538

Troubled debt restructured loans which had payment defaults during the three and nine month periods ended September 30, 2011, segregated by class, are shown in the table below (dollars in thousands). Default occurs when a loan or lease is 90 days or more past due or transferred to nonaccrual and is within 12 months of restructuring.


	Three Months Ended September 30, 2011				Nine Months Ended September 30, 2011
	Number of Defaults		Recorded Balance		Number of Defaults		Recorded Balance
Real estate loans:
Commercial		—		—		—		—
Residential		3	$	223		3	$	223
Construction		—		—		—		—
Commercial loans and leases		—		—		—		—
Municipal loans		—		—		—		—
Consumer loans		—		—		—		—

Total		3	$	223		3	$	223