Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2013

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 5 - Loans and Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable losses inherent in Lafayette Savings’ loan portfolios. In determining the appropriate amount of the allowance for loan losses, management makes numerous assumptions, estimates and assessments.

The strategy also emphasizes diversification on an industry and customer level, regular credit quality reviews and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

Lafayette Savings’ allowance consists of three components: probable losses estimated from individual reviews of specific loans, probable losses estimated from historical loss rates, and probable losses resulting from economic or other deterioration above and beyond what is reflected in the first two components of the allowance.

All loans that are rated substandard and impaired, or are troubled debt restructures, are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management’s estimate of the borrower’s ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Bank. Included in the review of individual loans are those that are impaired as provided in Financial Accounting Standards Board (“FASB”) ASC 310-10. Any allowances for impaired loans are determined by the fair value of the underlying collateral based on the discounted appraised value. Allowances for loans that are not collateral dependent are determined by the present value of expected future cash flows discounted at the loan’s effective interest rate. Historical loss rates are applied to all loans not included in the ASC 310-10 calculation.

Historical loss rates for commercial and consumer loans may be adjusted for significant qualitative factors that, in management’s judgment, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs and non-accrual loans), changes in mix, asset quality trends, risk management and loan administration, changes in the internal lending policies and credit standards, collection practices, examination results from bank regulatory agencies and Lafayette Savings’ internal loan review.

Allowances on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience.

Lafayette Savings’ primary market area for lending is Tippecanoe County, Indiana and to a lesser extent the eight surrounding counties. When evaluating the adequacy of the allowance, consideration is given to this regional geographic concentration and the closely associated effect of changing economic conditions on Lafayette Savings’ customers.

Categories of loans include:

	(Unaudited) September 30, 2013			December 31, 2012
	(In thousands)
Real Estate
One-to-four family residential	$	95,452		$	99,216
Multi-family residential		50,486			62,823
Commercial real estate		72,050			82,430
Construction and land development		15,896			14,113
Commercial		12,010			13,290
Consumer and other		1,137			1,131
Home equity lines of credit		16,779			16,421
Total loans		263,810			289,424
Less
Net deferred loan fees, premiums and discounts		(400	)		(469	)
Undisbursed portion of loans		(2,550	)		(2,798	)
Allowance for loan losses		(6,407	)		(5,900	)
Net loans	$	254,453		$	280,257

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

Commercial

Commercial loans 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.

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 Company’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, geography and risk grade criteria. As a general rule, the Company 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

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 complete 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 Company 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, governmental regulation of real property, general economic conditions and the availability of long-term financing.

Residential and Consumer

With respect to residential loans that are secured by one- to four-family residences that are usually owner occupied, the Company 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.

Additional information on the allocation of loan loss reserves by loan category, which does not include loans held for sale, for the three-month and nine-month periods ending September 30, 2013 and for the year ended December 31, 2012 is provided below.

	Allowance for Loan Losses and Recorded Investment in Loans
Three Months Ended September 30, 2013	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4		Multi- family			Commercial Real Estate		Construction			Land			Consumer and Home Equity			Total
	(Unaudited; In thousands)
Beginning balance	$	915		$	552		$	990	$	1,001		$	2,259	$	46		$	348		$	235		$	6,346
Provision charged to expense		(138	)		(8	)		5		(73	)		231		(12	)		(9	)		29			25
Losses charged off		(3	)		---			---		---			12		---			---			(35	)		(26	)
Recoveries		39			---			3		---			8		---			12			---			62
Ending balance	$	813		$	544		$	998	$	928		$	2,510	$	34		$	351		$	229		$	6,407

Nine Months Ended September 30, 2013	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4			Multi- family			Commercial Real Estate			Construction			Land			Consumer and Home Equity			Total
	(Unaudited; In thousands)
Beginning balance	$	633		$	589		$	1,022		$	1,055		$	2,177		$	62		$	154		$	208		$	5,900
Provision charged to expense		156			(46	)		98			(127	)		364			(28	)		177			56			650
Losses charged off		(32	)		---			(241	)		---			(39	)		---			(10	)		(35	)		(357	)
Recoveries		56			1			119			---			8			---			30			---			214
Ending balance		813			544			998			928			2,510			34			351			229			6,407
ALL individually evaluated		---			13			30			---			767			---			47			---			857
ALL collectively evaluated		813			531			968			928			1,743			34			304			229			5,550
Total ALL		813			544			998			928			2,510			34			351			229			6,407
Loans individually evaluated		---			1,035			3,648			533			6,246			---			820			90			12,372
Loans collectively evaluated		12,010			45,007			45,762			49,953			65,804			5,943			9,133			17,826			251,438
Total loans evaluated	$	12,010		$	46,042		$	49,410		$	50,486		$	72,050		$	5,943		$	9,953		$	17,916		$	263,810

Three Months Ended September 30, 2012	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4			Multi- family			Commercial Real Estate			Construction		Land			Consumer and Home Equity		Total
	(Unaudited; In thousands)
Beginning balance	$	684		$	432		$	1,118		$	888		$	1,859		$	8	$	120		$	159	$	5,268
Provision charged to expense		(61	)		159			(158	)		(9	)		524			19		(10	)		36		500
Losses charged off		---			(42	)		(45	)		---			(283	)		---		---			---		(370	)
Recoveries		8			---			3			1			---			---		72			---		84
Ending balance	$	631		$	549		$	918		$	880		$	2,100		$	27	$	182		$	195	$	5,482

Nine Months Ended September 30, 2012	Commercial			Owner Occupied 1-4			Non-owner Occupied 1-4			Multi- family			Commercial Real Estate			Construction			Land			Consumer and Home Equity			Total
	(Unaudited; In thousands)
Beginning balance	$	667		$	436		$	1,330		$	646		$	1,788		$	64		$	264		$	136		$	5,331
Provision charged to expense		400			171			(351	)		492			1,011			(37	)		(155	)		70			1,600
Losses charged off		(462	)		(58	)		(83	)		(259	)		(699	)		---			(16	)		(11	)		(1,588	)
Recoveries		26			---			22			1			---			---			89			---			138
Ending balance		631			549			918			880			2,100			27			182			195			5,482
ALL individually evaluated		2			36			27			---			290			---			---			5			360
ALL collectively evaluated		629			513			891			880			1,810			27			182			190			5,122
Total ALL		631			549			918			880			2,100			27			182			195			5,482
Loans individually evaluated		298			1,322			6,483			2,126			9,244			---			751			162			20,386
Loans collectively evaluated		11,169			48,950			45,310			62,079			78,262			7,131			4,634			17,854			275,389
Total loans evaluated	$	11,467		$	50,272		$	51,793		$	64,205		$	87,506		$	7,131		$	5,385		$	18,016		$	295,775

	Allowance for Loan Losses and Recorded Investment in Loans
At December 31, 2012	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total
	(In thousands)
ALL individually evaluated	$	---	$	14	$	27	$	24	$	253	$	---	$	---	$	---	$	318
ALL collectively evaluated		633		575		993		1,031		1,924		62		154		208		5,582
Total ALL		633		589		1,021		1,055		2,177		62		154		208		5,900
Loans individually evaluated		49		1,653		5,917		2,891		6,233		---		1,379		92		18,214
Loans collectively evaluated		13,241		46,892		44,754		59,932		76,197		8,928		3,806		17,460		271,210
Total loans evaluated	$	13,290	$	48,545	$	50,671	$	62,823	$	82,430	$	8,928	$	5,185	$	17,552	$	289,424

Management’s general practice is to charge down collateral dependent loans individually evaluated for impairment to the fair value of the underlying collateral.

Consistent with regulatory guidance, charge-offs on all loan segments are taken when specific loans, or portions thereof, are considered uncollectible. The Company’s policy is to promptly charge these loans off in the period the uncollectible loss is reasonably determined.

For all loan portfolio segments except one- to four-family residential properties and consumer, the Company promptly charges-off loans, or portions thereof, when available information confirms that specific loans are uncollectible based on information that includes, but is not limited to, (1) the deteriorating financial condition of the borrower, (2) declining collateral values, and/or (3) legal action, including bankruptcy, that impairs the borrower’s ability to adequately meet its obligations. For impaired loans that are considered to be solely collateral dependent, a partial charge-off is recorded when a loss has been confirmed by an updated appraisal or other appropriate valuation of the collateral.

The Company charges-off one- to four-family residential and consumer loans, or portions thereof, when the Company reasonably determines the amount of the loss. The Company adheres to timeframes established by applicable regulatory guidance which provides for the charge-down of one- to four-family first and junior lien mortgages to the net realizable value less costs to sell when the loan is 120 days past due, charge-off of unsecured open-end loans when the loan is 120 days past due, and charge-down to the net realizable value when other secured loans are 120 days past due. Loans at these respective delinquency thresholds for which the Company can clearly document that the loan is both well-secured and in the process of collection, such that collection will occur regardless of delinquency status, need not be charged off. Charge-offs may be taken sooner than the above-referenced timeframes if circumstances warrant.

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 historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the prior four years. Management believes the four year 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 rate all loans by credit quality using the following designations:

GRADE 1 - Pass, superior credit quality

Loans of the highest quality. Financial strength of the borrower (exhibited by extremely low debt-to-income ratios/high debt-service coverage, low loan-to-value ratio, and clean credit history) is such that no loss is anticipated.  Probability of serious or rapid deterioration is extremely small.

GRADE 2 - Pass, good credit quality

Loans of good quality. Overall above average credit, with strong capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 1, but still better than average levels), sound credit history and employment. Loan-to-value is not as strong as Grade 1, but is greater than Grade 3. Minor loss exposure with the probability of serious financial deterioration unlikely.

GRADE 3 - Pass, low risk

Loans of satisfactory quality. Average quality due to average capacity to repay (exhibited by higher debt-to-income ratios/lower debt-service coverage than Grade 2 but better than levels requiring Loan Committee approval), employment, credit history, loan-to-value ratio, or paying habits.  Deterioration possible if adverse factors occur.

GRADE 4 - Pass, acceptable risk

Loans of marginal, but acceptable quality due to below average capacity to repay (exhibited by high debt-to-income ratios/low debt-service coverage), high loan-to-value, or poor paying habits. Deterioration likely if adverse factors occur.

GRADE W-4 - Pass, watch list credit

These loans have the same characteristics as standard Grade 4 loans, with an added significant weakness such as the global debt-service coverage of the borrower being below 1.00. Such loans should have no delinquencies within the previous 12 months.

GRADE 5- Special Mention

Loans in this classification are in a state of change that could adversely affect paying ability, collateral value or which require monthly monitoring to protect the asset value.

GRADE 6- Substandard

A substandard asset with a defined weakness. Heavy debt condition, deterioration of collateral, poor paying habits, or conditions present that unless deficiencies are corrected will result in some loss. Loans 90 or more days past due should be automatically included in this grade.

GRADE 7- Doubtful

Poor quality. Loans in this group are characterized by less than adequate collateral and all of the characteristics of a loan classified as substandard. The possibility of a loss is extremely high, but factors may be underway to minimize the loss or maximize the recovery.

GRADE 8 - Loss

Loans classified loss are considered uncollectible and of such little value that their continuance as an asset is not warranted.

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.

Subsequent payments on non-accrual loans are recorded as a reduction of principal, and interest income is recorded only after principal recovery is reasonably assured. Non-accrual loans are returned to accrual status when, in the opinion of management, the financial position of the borrower indicates there is no longer any reasonable doubt as to the timely collection of interest or principal. The Company requires a period of satisfactory performance of not less than six months before returning a non-accrual loan to accrual status.

The following table provides an analysis of loan quality using the above designations, based on property type at September 30, 2013.

Credit Rating	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total
							(Unaudited; In thousands)
1 - Superior	$	22	$	3,353	$	228	$	---	$	98	$	--	$	268	$	1,614	$	5,583
2 - Good		1,236		20,620		3,614		1,771		10,358		2,717		1,854		11,440		53,610
3 - Pass Low risk		4,437		14,736		12,761		25,870		17,326		2,670		4,659		3,916		86,375
4 - Pass		3,757		5,362		24,040		15,285		26,218		556		1,792		909		77,919
4W - Watch		108		840		3,315		5,950		9,393		---		80		---		19,686
5 - Special mention		---		278		1,283		1,540		352		---		480		37		3,970
6 - Substandard		2,450		853		4,169		70		8,305		---		820		---		16,667
7 - Doubtful		---		---		---		---		---		---		---		---		---
8 - Loss		---		---		---		---		---		---		---		---		---
Total	$	12,010	$	46,042	$	49,410	$	50,486	$	72,050	$	5,943	$	9,953	$	17,916	$	263,810

The following table provides an analysis of loan quality using the above designations, based on property type at December 31, 2012.

Credit Rating	Commercial		Owner Occupied 1-4		Non-owner Occupied 1-4		Multi- family		Commercial Real Estate		Construction		Land		Consumer and Home Equity		Total
							(In thousands)
1 - Superior	$	27	$	3,849	$	246	$	---	$	103	$	667	$	193	$	1,787	$	6,872
2 - Good		3,061		20,104		4,299		7,661		10,924		1,123		172		11,311		58,655
3 - Pass Low risk		7,982		16,459		12,625		31,281		31,853		5,383		286		3,374		109,243
4 - Pass		1,689		6,221		24,623		18,010		22,993		1,755		1,387		1,078		77,756
4W - Watch		186		746		2,894		2,954		5,014		---		1,769		---		13,563
5 - Special mention		296		---		2,535		2,139		4,658		---		---		---		9,628
6 - Substandard		49		1,166		3,449		778		6,885		---		1,378		2		13,707
7 - Doubtful		---		---		---		---		---		---		---		---		---
8 - Loss		---		---		---		---		---		---		---		---		---
Total	$	13,290	$	48,545	$	50,671	$	62,823	$	82,430	$	8,928	$	5,185	$	17,552	$	289,424

Analyses of past due loans segregated by loan type as of September 30, 2013 and December 31, 2012 are provided below.

	Loan Portfolio Aging Analysis as of September 30, 2013 (Unaudited)
	30-59 Days		60-89 Days		Over 90 Days		Total Past Due		Current		Total Loans		Under 90 Days and Not Accruing		Total 90 Days and Accruing
	(In thousands)
Commercial	$	---	$	---	$	---	$	---	$	12,010	$	12,010	$	---	$	---
Owner occupied 1-4		---		88		4		92		45,950		46,042		658		---
Non-owner occupied 1-4		---		---		1,244		1,244		48,166		49,410		470		---
Multi-family		---		---		70		70		50,416		50,486		---		---
Commercial real estate		---		---		170		170		71,880		72,050		16		---
Construction		---		---		---		---		5,943		5,943		---		---
Land		---		---		130		130		9,823		9,953		---		---
Consumer and home equity		---		---		---		---		17,916		17,916		---		---
Total	$	---	$	88	$	1,618	$	1,706	$	262,104	$	263,810	$	1,144	$	---

	Loan Portfolio Aging Analysis as of December 31, 2012
	30-59 Days		60-89 Days		Over 90 Days		Total Past Due		Current		Total Loans		Under 90 Days and Not Accruing		Total 90 Days and Accruing
	(In thousands)
Commercial	$	---	$	---	$	49	$	49	$	13,241	$	13,290	$	---	$	---
Owner occupied 1-4		184		406		107		697		47,848		48,545		862		---
Non-owner occupied 1-4		291		216		2,124		2,631		48,040		50,671		543		---
Multi-family		700		78		---		778		62,045		62,823		76		---
Commercial real estate		---		---		487		487		81,943		82,430		815		---
Construction		---		---		---		---		8,928		8,928		---		---
Land		---		79		140		219		4,966		5,185		1,238		---
Consumer and home equity		1		2		---		3		17,549		17,552		2		---
Total	$	1,176	$	781	$	2,907	$	4,864	$	284,560	$	289,424	$	3,536	$	---

Impaired loans are those for which we believe it is probable that we will not collect all principal and interest due in accordance with the original terms of the loan agreement. The following tables present impaired loans and interest recognized on them for the quarter and nine months ended September 30, 2013, impaired loans for the year ended December 31, 2012, and interest recognized for the quarter and nine months ended September 30, 2012.

	Impaired Loans as of and for the Quarter and Nine Months ended September 30, 2013 (Unaudited)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Quarterly Average Impaired Loans		Year-to-date Average Impaired Loans		Quarterly Interest Income Recognized		Year-to-date Interest Income Recognized
	(In thousands)
Loans without specific valuation allowance
Commercial	$	---	$	144	$	---	$	3	$	19	$	---	$	---
Owner occupied 1-4		906		1,019		---		1,033		1,249		24		21
Non-owner occupied 1-4		3,366		4,009		---		4,549		5,136		64		195
Multi-family		533		552		---		1,346		1,939		22		80
Commercial real estate		2,477		2,924		---		3,663		4,423		116		260
Construction		---		---		---		---		---		---		---
Land		725		990		---		725		890		17		---
Consumer and home equity		90		91		---		109		100		1		4
Total loans without a specific valuation allowance		8,097		9,729		---		11,428		13,756		244		560
Loans with a specific valuation allowance
Commercial		---		---		---		---		---		---		---
Owner occupied 1-4		129		133		13		129		129		2		2
Non-owner occupied 1-4		282		282		30		292		284		1		1
Multi-family		---		---		---		---		---		---		---
Commercial real estate		3,769		3,769		767		3,778		1,889		87		263
Construction		---		---		---		---		---		---		---
Land		95		95		47		100		50		1		2
Consumer and home equity		---		---		---		---		---		---		---
Total loans with a specific valuation allowance		4,275		4,279		857		4,299		2,352		91		268
Total
Commercial		---		144		---		3		19		---		---
Owner occupied 1-4		1,035		1,152		13		1,162		1,378		26		23
Non-owner occupied 1-4		3,648		4,291		30		4,841		5,420		65		196
Multi-family		533		552		---		1,346		1,939		22		80
Commercial real estate		6,246		6,693		767		7,441		6,312		203		523
Construction		---		---		---		---		---		---		---
Land		820		1,085		47		825		940		18		2
Consumer and home equity		90		91		---		109		100		1		4
Total impaired loans	$	12,372	$	14,008	$	857	$	15,727	$	16,108	$	335	$	828

	Impaired loans as of and for the Year Ended December 31, 2012						Impaired loans for the Quarter and Nine Months Ended September 30, 2012 (Unaudited)
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Quarterly Average Impaired Loans		Year-to-date Average Impaired Loans		Quarterly Interest Income Recognized		Year-to-date Interest Income Recognized
							(In thousands)
Loans without a specific valuation allowance
Commercial	$	49	$	521	$	---	$	63	$	698	$	---	$	4
Owner occupied 1-4		1,421		1,535		---		1,266		1,473		17		77
Non-owner occupied 1-4		5,636		5,900		---		6,176		6,627		60		217
Multi-family		2,813		2,865		---		1,935		2,782		29		122
Commercial real estate		4,667		5,720		---		7,301		7,952		70		250
Construction		---		---		---		---		---		---		---
Land		1,379		1,615		---		1,206		1,612		1		3
Consumer and home equity		92		114		---		158		177		2		6
Total loans without a specific valuation allowance		16,057		18,360		---		18,105		21,321		179		679
Loans with a specific valuation allowance
Commercial		---		---		---		235		179		5		7
Owner occupied 1-4		232		240		14		132		107		2		4
Non-owner occupied 1-4		281		281		27		340		369		1		3
Multi-family		78		83		24		200		304		---		---
Commercial real estate		1,566		1,567		253		2,405		2,849		12		40
Construction		---		---		---		---		---		---		---
Land		---		---		---		---		---		---		---
Consumer and home equity		---		---		---		3		1		---		---
Total loans with a specific valuation allowance		2,157		2,171		318		3,315		3,809		20		54
Total
Commercial		49		521		---		298		877		5		11
Owner occupied 1-4		1,653		1,775		14		1,393		1,580		20		80
Non-owner occupied 1-4		5,917		6,271		27		6,517		6,996		61		221
Multi-family		2,891		2,948		24		2,135		3,086		29		121
Commercial real estate		6,233		7,287		253		9,706		10,801		81		290
Construction		---		---		---		---		---		---		---
Land		1,379		1,615		---		1,206		1,613		1		4
Consumer and home equity		92		114		---		165		178		2		6
Total impaired loans	$	18,214	$	20,531	$	318	$	21,420	$	25,131	$	199	$	733

All loans rated substandard that have had an impairment allocated to them and all troubled debt restructures are considered impaired. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect all amounts due (both principal and interest) according to contractual terms of the loan agreement. Loans that are considered impaired are reviewed to determine if a specific allowance is required based on the borrower’s financial condition, resources and payment record, support from guarantors and the realizable value of any collateral. As a practical expedient, the Bank will typically use the collateral fair market value method to determine impairments unless circumstances preclude its use. In this method, any portion of the investment above the current fair market value of the collateral should be identified as an impairment. Fair market value is determined using a current appraisal or evaluation in compliance with federal appraisal regulations.

The following table gives a breakdown of non-accruing loans by loan class at September 30, 2013 and at December 31, 2012.

	(Unaudited)
	September 30, 2013		December 31, 2012
	(In thousands)
Commercial	$	---	$	49
Owner occupied 1-4		663		969
Non-owner occupied 1-4		1,713		2,667
Multi-family		70		76
Commercial real estate		186		1,302
Construction		---		---
Land		130		1,378
Consumer and home equity		---		2
Total	$	2,762	$	6,443

Loans are placed on non-accrual status when, in the judgment of management, the probability of collection of interest is deemed to be insufficient to warrant further accrual. All interest accrued, but not received for loans placed on non-accrual, is reversed against interest income. Interest subsequently received on such loans is accounted for by using the cost-recovery basis for commercial loans and the cash basis for retail loans until qualifying for return to accrual status.

The following tables present information regarding troubled debt restructurings by class for the three months and nine months ended September 30, 2013 and 2012.

	Newly restructured loans for the three months ended September 30, 2013 (Unaudited)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification
	(Dollars in thousands)
Commercial		---	$	---	$	---		---
Owner occupied 1-4		---		---		---		---
Non-owner occupied 1-4		---		---		---		---
Multi-family		---		---		---		---
Commercial real estate		---		---		---		---
Construction		---		---		---		---
Land		1		95		95	Rate and term
Consumer and home equity		---		---		---		---
Total		1	$	95	$	95

	Newly restructured loans for the three months ended September 30, 2012 (Unaudited)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification
	(Dollars in thousands)
Commercial		---	$	---	$	---		---
Owner occupied 1-4		1		87		87	Term
Non-owner occupied 1-4		---		---		---		---
Multi-family		---		---		---		---
Commercial real estate		---		---		---		---
Construction		---		---		---		---
Land		---		---		---		---
Consumer and home equity		---		---		---		---
Total		1	$	87	$	87

	Newly restructured loans for the nine months ended September 30, 2013 (Unaudited)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification
	(Dollars in thousands)
Commercial		---	$	---	$	---		---
Owner occupied 1-4		1		38		38	Below market rate
Non-owner occupied 1-4		7		1,520		1,246	A/B note, payment adjustment, term
Multi-family		---		---		---		---
Commercial real estate		1		778		761	Term
Construction		---		---		---		---
Land		1		95		95	Rate and term
Consumer and home equity		1		29		29	Term
Total		11	$	2,460	$	2,169

	Newly restructured loans for the nine months ended September 30, 2012 (Unaudited)
	Number of loans		Pre-modification Recorded Balance		Post-modification Recorded Balance		Type of Modification
	(Dollars in thousands)
Commercial		---	$	---	$	---		---
Owner occupied 1-4		1		108		108	Below market rate
Owner-occupied 1-4		1		87		87	High loan-to-value
Non-owner occupied 1-4		---		---		---		---
Multi-family		---		---		---		---
Commercial real estate		2		345		345	Below market rate
Construction		---		---		---		---
Land		---		---		---		---
Consumer and home equity		---		---		---		---
Total		4	$	540	$	540

	Troubled debt restructurings that subsequently defaulted for the three months ended September 30, 2012 (Unaudited)			Troubled debt restructurings that subsequently defaulted for the nine months ended September 30, 2012 (Unaudited)
	Number of loans	Recorded Balance		Number of loans	Recorded Balance
	(Dollars in thousands)			(Dollars in thousands)
Commercial	---	$	---	1	$	125
Owner occupied 1-4	---		---	---		---
Non-owner occupied 1-4	---		---	---		---
Multi-family	---		---	---		---
Commercial Real Estate	1		1,374	1		1,374
Construction	---		---	---		---
Land	---		---	---		---
Consumer and home equity	---		--	---		---
Total	1	$	1,374	2	$	1,499

There were no troubled debt restructurings modified in the past 12 months that subsequently defaulted for the three months or nine months ended September 30, 2013.