5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2014 and December 31, 2013 are summarized as follows. Net deferred loan costs were $420 and $24 at June 30, 2014 and December 31, 2013.


	June 30, 2014		December 31, 2013
Commercial	$	337,033	$	350,680
Real estate:
Commercial		439,942		413,058
Residential		317,929		322,062
Consumer		84,943		90,817

Total	$	1,179,847	$	1,176,617

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2014 and 2013 are summarized as follows:


				Real estate
June 30, 2014	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance April 1, 2014	$	1,961		$	2,473		$	3,248		$	1,177		$	8,859
Charge-offs		(29	)		(404	)		(270	)		(87	)		(790	)
Recoveries		1			269			35			47			352
Provisions		268			337			445			151			1,201

Ending balance	$	2,201		$	2,675		$	3,458		$	1,288		$	9,622


				Real estate
June 30, 2014	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance January 1, 2014	$	2,008		$	2,394		$	3,135		$	1,114		$	8,651
Charge-offs		(376	)		(432	)		(510	)		(155	)		(1,473	)
Recoveries		1			269			38			78			386
Provisions		568			444			795			251			2,058

Ending balance	$	2,201		$	2,675		$	3,458		$	1,288		$	9,622


			Real estate
June 30, 2013	Commercial		Commercial		Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance April 1, 2013	$	799	$	2,304	$	3,100		$	907		$	7,110
Charge-offs						(51	)		(51	)		(102	)
Recoveries						41			3			44
Provisions		400				2			98			500

Ending balance	$	1,199	$	2,304	$	3,092		$	957		$	7,552


			Real estate
June 30, 2013	Commercial		Commercial		Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance January 1, 2013	$	799	$	2,304	$	2,981		$	866		$	6,950
Charge-offs						(207	)		(117	)		(324	)
Recoveries						106			20			126
Provisions		400				212			188			800

Ending balance	$	1,199	$	2,304	$	3,092		$	957		$	7,552

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2014 and December 31, 2013 is summarized as follows:


			Real estate
June 30, 2014	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	2,201	$	2,675	$	3,458	$	1,288		$	9,622

Ending balance: individually evaluated for impairment		1,157		527		162					1,846

Ending balance: collectively evaluated for impairment		1,044		2,148		3,296		1,288			7,776

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

Loans receivable:
Ending balance	$	337,033	$	439,942	$	317,929	$	84,943		$	1,179,847

Ending balance: individually evaluated for impairment		2,859		7,210		2,916		97			13,082

Ending balance: collectively evaluated for impairment		332,627		428,656		314,952	$	84,846			1,161,081

Ending balance: loans acquired with deteriorated credit quality	$	1,547	$	4,076	$	61				$	5,684


			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 loan 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 June 30, 2014 and December 31, 2013:


June 30, 2014	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	322,316	$	4,469	$	10,248		$	337,033
Real estate:
Commercial		414,853		10,389		14,700			439,942
Residential		311,248		1,423		5,258			317,929
Consumer		84,850		15		78			84,943

Total	$	1,133,267	$	16,296	$	30,284		$	1,179,847


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 June 30, 2014 and December 31, 2013 is summarized as follows:


	June 30, 2014		December 31, 2013
Commercial	$	1,777	$	2,035
Real estate:
Commercial		8,779		9,172
Residential		2,963		3,569
Consumer		97		90

Total	$	13,616	$	14,866

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


June 30, 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	$	519			$	1,837	$	2,356	$	334,677	$	337,033	$	60
Real estate:
Commercial		1,337	$	34		8,779		10,150		429,792		439,942
Residential		2,600		940		4,221		7,761		310,168		317,929		1,258
Consumer		728		196		472		1,396		83,547		84,943		375

Total	$	5,184	$	1,170	$	15,309	$	21,663	$	1,158,184	$	1,179,847	$	1,693


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 as of and for the three and six months ended June 30, 2014 and June 30, 2013, and as of and for the year ended, December 31, 2013 by major loan classification:


							This Quarter				Year-to-Date
June 30, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	2,649	$	4,470			$	2,329	$	28	$	2,908	$	52
Real estate:
Commercial		9,899		12,619				9,929		19		10,077		38
Residential		2,720		2,908				2,730		1		2,801		2
Consumer		97		97				113				111

Total		15,365		20,094				15,101		48		15,897		92


With an allowance recorded:
Commercial		1,757		1,757	$	1,157		1,743		23		1,853		43
Real estate:
Commercial		1,387		1,387		527		1,395		14		1,397		29
Residential		257		257		162		259				390
Consumer

Total		3,401		3,401		1,846		3,397		37		3,640		72


Commercial		4,406		6,227		1,157		4,072		51		4,761		95
Real estate:
Commercial		11,286		14,006		527		11,324		33		11,474		67
Residential		2,977		3,165		162		2,989		1		3,191		2
Consumer		97		97				113				111

Total	$	18,766	$	23,495	$	1,846	$	18,498	$	85	$	19,537	$	164


							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


							This Quarter				Year-to-Date
June 30, 2013	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	325	$	325			$	239			$	280
Real estate:
Commercial		314		314				370				287
Residential		1,437		1,437				970				1,047
Consumer		52		52				82				70

Total		2,128		2,128				1,661				1,684


With an allowance recorded:
Commercial		612		612	$	612		712	$	8		532	$	12
Real estate:
Commercial		1,443		1,443		300		1,162		19		1,445		38
Residential		665		665		262		1,150		3		1,233		6
Consumer

Total		2,720		2,720		1,174		3,024		30		3,210		56


Commercial		937		937		612		951		8		812		12
Real estate:
Commercial		1,757		1,757		300		1,532		19		1,732		38
Residential		2,102		2,102		262		2,120		3		2,280		6
Consumer		52		52				82				70

Total	$	4,848	$	4,848	$	1,174	$	4,685	$	30	$	4,894	$	56

Included in the commercial loan and commercial real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $1,900 at June 30, 2014, $2,487 at December 31, 2013 and $346 at June 30, 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 six months ended June 30, 2014 and 2013. There were no defaults on loans restructured within the last twelve months.