4. LOANS, NET AND ALLOWANCE FOR LOAN LOSSES

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2011 and December 31, 2010 are summarized as follows. Net deferred loan costs were $549 at September 30, 2011, and $523 at December 31, 2010.

	September 30, 2011		December 31, 2010
Commercial	$	146,229	$	112,526
Real estate:
Commercial		141,489		136,910
Residential		118,778		119,424
Consumer		20,753		21,912
Total	$	427,249	$	390,772

The changes in the allowance for loan losses account by major classification of loan for the three months and nine months ended September 30, 2011 were as follows:

September 30, 2011	Commercial		Commercial real estate			Residential real estate			Consumer			Unallocated		Total
Beginning Balance, July 1, 2011	$	2,105	$	1,585		$	734		$	289		$	440	$	5,153
Charge-offs		265		21			1			30					317
Recoveries										14					14
Provisions		108		(11	)		(30	)		(21	)		223		269
Ending balance	$	1,948	$	1,553		$	703		$	252		$	663	$	5,119

Beginning Balance, January 1. 2011	$	1,696	$	1,384		$	726		$	243		$	51	$	4,100
Charge-offs		323		77			9			107					516
Recoveries				2			1			38					41
Provisions		575		244			(15	)		78			612		1,494
Ending balance	$	1,948	$	1,553		$	703		$	252		$	663	$	5,119
Ending balance: individually evaluated for impairment	$	806	$	57					$	27				$	890
Ending balance: collectively evaluated for impairment	$	1,142	$	1,496		$	703		$	225		$	663	$	4,229
Loans receivable:
Ending balance	$	146,229	$	141,489		$	118,778		$	20,753				$	427,249
Ending balance: individually evaluated for impairment	$	8,197	$	7,896		$	909		$	27				$	17,029
Ending balance: collectively evaluated for impairment	$	138,032	$	133,593		$	117,869		$	20,726				$	410,220
December 31, 2010
Allowance for loan losses:
Ending balance	$	1,696	$	1,384		$	726		$	243		$	51	$	4,100
Ending balance: individually evaluated for impairment	$	663	$	122		$	9		$	31				$	825
Ending balance: collectively evaluated for impairment	$	1,033	$	1,262		$	717		$	212		$	51	$	3,275
Loans receivable:
Ending balance	$	112,526	$	136,910		$	119,424		$	21,912				$	390,772
Ending balance: individually evaluated for impairment	$	5,916	$	8,923		$	674		$	47				$	15,560
Ending balance: collectively evaluated for impairment	$	106,610	$	127,987		$	118,750		$	21,865				$	375,212

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:

September 30, 2011:

	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	131,540	$	6,514	$	2,254	$	5,921	$	146,229
Real estate:
Commercial		134,645		621		5,076		1,147		141,489
Residential		117,869						909		118,778
Consumer		20,744		9						20,753
Total	$	404,798	$	7,144	$	7,330	$	7,977	$	427,249

December 31, 2010:

	Pass		Special Mention		Substandard		Doubtful		Total
Commercial	$	105,869	$	986	$	181	$	5,490	$	112,526
Real estate:
Commercial		118,972		8,836		8,731		371		136,910
Residential		118,794						630		119,424
Consumer		21,890						22		21,912
Total	$	365,525	$	9,822	$	8,912	$	6,513	$	390,772

The following table presents nonaccrual loans by classes of the loan portfolio:

	September 30, 2011		December 31, 2010
Commercial	$	5,921	$	5,490
Real estate:
Commercial		1,147		371
Residential		909		630
Consumer				22
Total	$	7,977	$	6,513

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:

September 30, 2011:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Loans Receivable > 90 Days and Accruing
Commercial	$	1,198	$	4	$	102	$	1,304	$	144,925	$	146,229	$	22
Real estate:
Commercial		1,114		329		537		1,980		139,509		141,489
Residential		1,676		167				1,843		116,935		118,778
Consumer		236		83		407		726		20,027		20,753		407
Total	$	4,224	$	583	$	1,046	$	5,853	$	421,396	$	427,249	$	429

December 31, 2010:

	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans Receivables		Loans Receivable > 90 Days and Accruing
Commercial	$	192	$	81	$	754	$	1,027	$	111,499	$	112,526	$	123
Real estate:
Commercial		1,431				1,049		2,480		134,430		136,910
Residential		1,260		358		626		2,244		117,180		119,424
Consumer		293		133		291		717		21,195		21,912		269
Total	$	3,176	$	572	$	2,720	$	6,468	$	384,304	$	390,772	$	392

The following tables summarize information in regards to impaired loans for the three and nine months ended September 30, 2011, and for the year ended December 31, 2010, by loan portfolio class:

September 30, 2011:

							This Quarter				Year to Date
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	4,097	$	4,097			$	6,179	$	16	$	6,243	$	186
Real estate:
Commercial		4,180		4,180				4,237		41		4,086		140
Residential		818		818				1,024				958
Consumer								13				13		1
Total		9,095		9,095				11,453		57		11,300		327

With an allowance recorded:
Commercial		4,100		4,400	$	806		4,565		16		3,219		37
Real estate:
Commercial		3,716		3,716		57		3,727		33		2,677		99
Residential		91		91				92				31
Consumer		27		27		27		12				10
Total		7,934		8,234		890		8,396		49		5,937		136

Total:
Commercial		8,197		8,497		806		10,744		32		9,462		223
Real estate:
Commercial		7,896		7,896		57		7,964		74		6,763		239
Residential		909		909				1,116				989
Consumer		27		27		27		25				23		1
Total	$	17,029	$	17,329	$	890	$	19,849	$	106	$	17,237	$	463

December 31, 2010:

	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance recorded:
Commercial	$	304	$	304			$	264	$	12
Real estate:
Commercial		6,263		6,263				6,394		392
Residential		383		383				384		2
Consumer		16		16				20		2
Total		6,966		6,966				7,062		408

With an allowance recorded:
Commercial		5,612		5,612	$	663		5,629		165
Real estate:
Commercial		2,660		2,660		122		2,714		166
Residential		291		291		9		292		5
Consumer		31		31		31		31
Total		8,594		8,594		825		8,666		336

Total:
Commercial		5,916		5,916		663		5,893		177
Real estate:
Commercial		8,923		8,923		122		9,108		558
Residential		674		674		9		676		7
Consumer		47		47		31		51		2
Total	$	15,560	$	15,560	$	825	$	15,728	$	744

Included in the commercial loan category are troubled debt restructurings that were classified as impaired. Trouble debt restructurings totaled $3,968 at September 30, 2011, and $4,185 at December 31, 2010, as described below.

The Company adopted the amendments in Accounting Standards Update (“ASU”) No. 2011-02, “A Creditor's Determination of Whether a Restructuring is a Troubled Debt Restructuring (“TDR”),” on July 1, 2011. As required, the Company reassessed all restructurings that occurred on or after the beginning of the current fiscal year (January 1, 2011) for identification as troubled debt restructurings. As a result of this reassessment, there were no additional restructurings required.

The Company offers a variety of modifications to borrowers. The modification categories offered can generally be described in the following categories:

Rate Modification - A modification in which the interest rate is changed.

Term Modification - A modification in which the maturity date, timing of payments or frequency of payments is changed.

Interest Only Modification - A modification in which the loan is converted to interest only payments for a period of time.

Payment Modification - A modification in which the dollar amount of the payment is changed, other than an interest only modification described above.

Combination Modification - Any other type of modification, including the use of multiple categories above.

The following table presents troubled debt restructurings as of September 30, 2011:

	Number of Contracts		Accrual Status		Non-Accrual Status		Total Modifications
Commercial		2			$	2,294	$	2,294
Real estate:
Commercial		1	$	1,674			$	1,674
Residential
Consumer
Total			$	1,674	$	2,294	$	3,968

The Company's policy is that loans placed on non-accrual will typically remain on non-accrual status until all principal and interest payments are brought current and the prospect for future payment in accordance with the loan agreement appear relatively certain. The Company's policy generally refers to six months of payment performance as sufficient to warrant a return to accrual status. There were no defaults of loans considered troubled debt restructurings for the three and nine month periods ended September 30, 2011. There were no charge-offs as a result of the troubled debt restructurings and the impact on interest income was minimal.

The following tables present newly restructured loans that occurred during the three and nine months ended September 30, 2011, respectively:

Pre-Modification Outstanding Recorded Investment:
Three months ended
	Number of Contracts	Rate Modifications	Term Modifications	Interest Only Modifications	Payment Modifications	Combination Modifications	Total Modifications
Commercial
Real estate:
Commercial
Residential
Consumer
Total
Post-Modification Outstanding Recorded Investment:
	Number of Contracts	Rate Modifications	Term Modifications	Interest Only Modifications	Payment Modifications	Combination Modifications	Total Modifications
Commercial
Real estate:
Commercial
Residential
Consumer
Total

Pre-Modification Outstanding Recorded Investment:
Nine months ended
	Number of Contracts	Rate Modifications	Term Modifications	Interest Only Modifications	Payment Modifications	Combination Modifications	Total Modifications
Commercial
Real estate:
Commercial	1	$1,682					$1,682
Residential
Consumer
Total		$1,682					$1,682
Post-Modification Outstanding Recorded Investment:
	Number of Contracts	Rate Modifications	Term Modifications	Interest Only Modifications	Payment Modifications	Combination Modifications	Total Modifications
Commercial
Real estate:
Commercial	1	$1,682					$1,682
Residential
Consumer
Total		$1,682					$1,682