5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at March 31, 2014 and December 31, 2013 are summarized as follows. Net deferred loan costs were $159 and $24 at March 31, 2014 and December 31, 2013.


	March 31, 2014		December 31, 2013
Commercial	$	358,729	$	350,680
Real estate:
Commercial		409,723		413,058
Residential		320,803		322,062
Consumer		87,867		90,817

Total	$	1,177,122	$	1,176,617

The changes in the allowance for loan losses account by major classification of loan for the three months ended March 31, 2014 and 2013 are summarized as follows:


				Real estate
March 31, 2014	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	2,008		$	2,394		$	3,135		$	1,114		$	8,651
Charge-offs		(347	)		(28	)		(240	)		(68	)		(683	)
Recoveries								3			31			34
Provisions		300			107			350			100			857

Ending balance	$	1,961		$	2,473		$	3,248		$	1,177		$	8,859


			Real estate
March 31, 2013	Commercial		Commercial		Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance	$	799	$	2,304	$	2,981		$	866		$	6,950
Charge-offs						(156	)		(66	)		(222	)
Recoveries						65			17			82
Provisions						210			90			300

Ending balance	$	799	$	2,304	$	3,100		$	907		$	7,110

The allocation of the allowance for loan losses and the related loans by major classifications of loans at March 31, 2014 and December 31, 2013 is summarized as follows:


			Real estate
March 31, 2014	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	1,961	$	2,473	$	3,248	$	1,177		$	8,859

Ending balance: individually evaluated for impairment		1,128		542		162					1,832

Ending balance: collectively evaluated for impairment		833		1,931		3,086		1,177			7,027

Ending balance: loans acquired with deteriorated credit quality	$		$		$		$			$

Loans receivable:
Ending balance	$	358,729	$	409,723	$	320,803	$	87,867		$	1,177,122

Ending balance: individually evaluated for impairment		2,548		7,232		2,674		128			12,582

Ending balance: collectively evaluated for impairment		354,993		398,361		317,802	$	87,739			1,158,895

Ending balance: loans acquired with deteriorated credit quality	$	1,188	$	4,130	$	327				$	5,645


			Real estate
December 31, 2013	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	2,008	$	2,394	$	3,135	$	1,114		$	8,651

Ending balance: individually evaluated for impairment		1,500		300		224					2,024

Ending balance: collectively evaluated for impairment		508		2,094		2,911		1,114			6,627

Ending balance: loans acquired with deteriorated credit quality	$		$		$		$			$

Loans receivable:
Ending balance	$	350,680	$	413,058	$	322,062	$	90,817		$	1,176,617

Ending balance: individually evaluated for impairment		4,504		7,711		3,321		90			15,626

Ending balance: collectively evaluated for impairment		343,502		401,168		318,274	$	90,727			1,153,671

Ending balance: loans acquired with deteriorated credit quality	$	2,674	$	4,179	$	467				$	7,320

The Company segments loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. Loans are individually analyzed for credit risk by classifying them within the Company’s internal risk rating system. The Company’s risk rating classifications are defined as follows:

•

Pass- A loan to borrowers with acceptable credit quality and risk that is not adversely classified as Substandard, Doubtful, Loss nor designated as Special Mention.

•

Special Mention- A loan that has potential weaknesses that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or in the institution’s credit position at some future date. Special Mention loans are not adversely classified since they do not expose the Company to sufficient risk to warrant adverse classification.

•

Substandard- A loan that is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not corrected.

•

Doubtful – A loan classified as Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristic that the weaknesses make the collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

•

Loss-A loan classified as Loss is considered uncollectible and of such little value that its continuance as bankable loans is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

The following tables present the major classification of loans summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system at March 31, 2014 and December 31, 2013:


March 31, 2014:	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	347,336	$	5,241	$	6,152		$	358,729
Real estate:
Commercial		384,591		10,163		14,969			409,723
Residential		314,567		1,023		5,213			320,803
Consumer		87,692		16		159			87,867

Total	$	1,134,186	$	16,443	$	26,493		$	1,177,122


December 31, 2013:	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	332,257	$	7,025	$	11,398		$	350,680
Real estate:
Commercial		386,825		10,701		15,532			413,058
Residential		314,544		861		6,657			322,062
Consumer		90,718		9		90			90,817

Total	$	1,124,344	$	18,596	$	33,677		$	1,176,617

Information concerning nonaccrual loans by major loan classification at March 31, 2014 and December 31, 2013 is summarized as follows:


	March 31, 2014		December 31, 2013
Commercial	$	1,164	$	2,035
Real estate:
Commercial		8,644		9,172
Residential		2,986		3,569
Consumer		128		90

Total	$	12,922	$	14,866

The major classifications of loans by past due status are summarized as follows:


March 31, 2014	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Commercial	$	809	$	689	$	1,171	$	2,669	$	356,060	$	358,729	$	7
Real estate:
Commercial		268		210		8,865		9,343		400,380		409,723		221
Residential		2,817		430		3,835		7,082		313,721		320,803		849
Consumer		501		82		714		1,297		86,570		87,867		586

Total	$	4,395	$	1,411	$	14,585	$	20,391	$	1,156,731	$	1,177,122	$	1,663


December 31, 2013	30-59 Days Past Due		60-89 Days Past Due		Greater than 90 Days		Total Past Due		Current		Total Loans		Loans > 90 Days and Accruing
Commercial	$	1,052	$	105	$	2,041	$	3,198	$	347,482	$	350,680	$	6
Real estate:
Commercial		1,641		75		9,372		11,088		401,970		413,058		200
Residential		3,676		985		4,247		8,908		313,154		322,062		678
Consumer		798		313		661		1,772		89,045		90,817		571

Total	$	7,167	$	1,478	$	16,321	$	24,966	$	1,151,651	$	1,176,617	$	1,455

The following tables summarize information concerning impaired loans at and for the period ended March 31, 2014, December 31, 2013 and March 31, 2013, by major loan classification:


							For the Quarter Ended
March 31, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	2,008	$	4,762			$	3,493
Real estate:
Commercial		9,958		12,746				10,227
Residential		2,740		3,144				2,872
Consumer		128		128				109

Total		14,834		20,780				16,701

With an allowance recorded:
Commercial		1,728		1,728	$	1,128		1,964	$	26
Real estate:
Commercial		1,404		1,404		542		1,399		18
Residential		261		261		162		523
Consumer

Total		3,393		3,393		1,832		3,886		44

Commercial		3,736		6,490		1,128		5,457		26
Real estate:
Commercial		11,362		14,150		542		11,626		18
Residential		3,001		3,405		162		3,395
Consumer		128		128				109

Total	$	18,227	$	24,173	$	1,832	$	20,587	$	44


							For the Year Ended
December 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	4,978	$	9,474			$	5,824
Real estate:
Commercial		10,496		13,352				10,095
Residential		3,004		3,437				2,614
Consumer		90		90				95

Total		18,568		26,353				18,628

With an allowance recorded:
Commercial		2,200		2,200	$	1,500		2,182	$	95
Real estate:
Commercial		1,394		1,394		300		1,409		76
Residential		784		784		224		672		13
Consumer

Total		4,378		4,378		2,024		4,263		184

Commercial		7,178		11,674		1,500		8,006		95
Real estate:
Commercial		11,890		14,746		300		11,504		76
Residential		3,788		4,221		224		3,286		13
Consumer		90		90				95

Total	$	22,946	$	30,731	$	2,024	$	22,891	$	184


							For the Quarter Ended
March 31, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	338	$	338			$	321
Real estate:
Commercial		262		262				204
Residential		1,321		1,321				1,125
Consumer		87		87				58

Total		2,008		2,008				1,708

With an allowance recorded:
Commercial		349		349	$	349		350	$	4
Real estate:
Commercial		1,446		1,446		300		1,731		19
Residential		1,137		1,137		212		1,317		3
Consumer

Total		2,932		2,932		861		3,398		26

Commercial		687		687		349		671		4
Real estate:
Commercial		1,708		1,708		300		1,935		19
Residential		2,458		2,458		212		2,442		3
Consumer		87		87				58

Total	$	4,940	$	4,940	$	861	$	5,106	$	26

Included in the commercial loan and commercial real estate categories are troubled debt restructurings that are classified as impaired. Trouble debt restructurings totaled $1,924 at March 31, 2014, $2,487 at December 31, 2013 and $349 at March 31, 2013.

Troubled debt restructured loans are loans with original terms, interest rate, or both, that have been modified as a result of a deterioration in the borrower’s financial condition and a concession has been granted that the Company would not otherwise consider. Unless on nonaccrual, interest income on these loans is recognized when earned, using the interest method. The Company offers a variety of modifications to borrowers that would be considered concessions. The modification categories offered can generally fall within the following categories:

•

Rate Modification—A modification in which the interest rate is changed to a below market rate.

•

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.

There were no loans modified as troubled debt restructurings for the three months ended March 31, 2014 and 2013.