5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at September 30, 2014 and December 31, 2013 are summarized as follows. Net deferred loan costs were $526 and $24 at September 30, 2014 and December 31, 2013.


	September 30, 2014		December 31, 2013
Commercial	$	323,312	$	350,680
Real estate:
Commercial		456,153		413,058
Residential		315,082		322,062
Consumer		85,395		90,817

Total	$	1,179,942	$	1,176,617

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


				Real estate
September 30, 2014	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance July 1, 2014	$	2,201		$	2,675		$	3,458		$	1,288		$	9,622
Charge-offs					(57	)		(56	)		(64	)		(177	)
Recoveries		5			22						33			60
Provisions		152			185			239			90			666

Ending balance	$	2,358		$	2,825		$	3,641		$	1,347		$	10,171


				Real estate
September 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	)		(489	)		(566	)		(219	)		(1,650	)
Recoveries		6			291			38			111			446
Provisions		720			629			1,034			341			2,724

Ending balance	$	2,358		$	2,825		$	3,641		$	1,347		$	10,171


				Real estate
September 30, 2013	Commercial			Commercial		Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance July 1, 2013	$	1,199		$	2,304	$	3,092		$	957		$	7,552
Charge-offs		(5	)				(168	)		(43	)		(216	)
Recoveries							5			5			10
Provisions		513					(98	)		110			525

Ending balance	$	1,707		$	2,304	$	2,831		$	1,029		$	7,871


				Real estate
September 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		(5	)				(375	)		(160	)		(540	)
Recoveries							111			25			136
Provisions		913					114			298			1,325

Ending balance	$	1,707		$	2,304	$	2,831		$	1,029		$	7,871

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


			Real estate
September 30, 2014	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	2,358	$	2,825	$	3,641	$	1,347		$	10,171

Ending balance: individually evaluated for impairment		1,163		660		275		17			2,115

Ending balance: collectively evaluated for impairment		1,195		2,165		3,366		1,330			8,056

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

Loans receivable:
Ending balance	$	323,312	$	456,153	$	315,082	$	85,395		$	1,179,942

Ending balance: individually evaluated for impairment		2,721		7,799		3,318		81			13,919

Ending balance: collectively evaluated for impairment		319,179		446,985		311,703	$	85,314			1,163,181

Ending balance: loans acquired with deteriorated credit quality	$	1,412	$	1,369	$	61				$	2,842


			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 September 30, 2014 and December 31, 2013:


September 30, 2014	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	311,685	$	4,207	$	7,420		$	323,312
Real estate:
Commercial		430,443		10,100		15,610			456,153
Residential		306,007		1,399		7,676			315,082
Consumer		85,324		14		57			85,395

Total	$	1,133,459	$	15,720	$	30,763		$	1,179,942


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


	September 30, 2014		December 31, 2013
Commercial	$	1,626	$	2,035
Real estate:
Commercial		6,666		9,172
Residential		2,951		3,569
Consumer		81		90

Total	$	11,324	$	14,866

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


September 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	$	284	$	17	$	1,668	$	1,969	$	321,343	$	323,312	$	42
Real estate:
Commercial		1,243		200		6,676		8,119		448,034		456,153		10
Residential		1,631		1,031		3,502		6,164		308,918		315,082		551
Consumer		624		344		433		1,401		83,994		85,395		352

Total	$	3,782	$	1,592	$	12,279	$	17,653	$	1,162,289	$	1,179,942	$	955


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 nine months ended September 30, 2014 and September 30, 2013, and as of and for the year ended, December 31, 2013 by major loan classification:


							This Quarter				Year-to-Date
September 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	$	2,352	$	4,076			$	2,501	$	19	$	2,771	$	71
Real estate:
Commercial		5,275		6,074				7,587		20		9,238		58
Residential		2,629		2,816				2,675		1		2,758		3
Consumer		64		64				81				101

Total		10,320		13,030				12,844		40		14,868		132

With an allowance recorded:
Commercial		1,781		1,781	$	1,163		1,769		20		1,825		63
Real estate:
Commercial		3,893		3,893		660		2,640		14		1,816		43
Residential		750		750		275		504		4		428		4
Consumer		17		17		17		9				3

Total		6,441		6,441		2,115		4,922		38		4,072		110

Commercial		4,133		5,857		1,163		4,270		39		4,596		134
Real estate:
Commercial		9,168		9,967		660		10,227		34		11,054		101
Residential		3,379		3,566		275		3,179		5		3,186		7
Consumer		81		81		17		90				104

Total	$	16,761	$	19,471	$	2,115	$	17,766	$	78	$	18,940	$	242


							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
September 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	$	305	$	305			$	82			$	213
Real estate:
Commercial		267		267				293				289
Residential		1,621		1,621				1,552				1,217
Consumer		99		99				85				75

Total		2,292		2,292				2,012				1,794

With an allowance recorded:
Commercial		2,064		2,064	$	1,464		3,226	$	70		1,440	$	82
Real estate:
Commercial		1,424		1,424		300		1,396		19		1,435		57
Residential		599		599		195		372		4		943		10
Consumer

Total		4,087		4,087		1,959		4,994		93		3,818		149

Commercial		2,369		2,369		1,464		3,308		70		1,653		82
Real estate:
Commercial		1,691		1,691		300		1,689		19		1,724		57
Residential		2,220		2,220		195		1,924		4		2,160		10
Consumer		99		99				85				75

Total	$	6,379	$	6,379	$	1,959	$	7,006	$	93	$	5,612	$	149

Included in the commercial loan and commercial real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $2,500 at September 30, 2014, $2,487 at December 31, 2013 and $344 at September 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 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 was one loan modified as a troubled debt restructuring for the nine months ended September 30, 2014 in the amount of $2,500. There were no new loans modified as troubled debt restructurings for the nine months ended September 30, 2013. During the three and nine months ended September 30, 2014 and 2013, there were no defaults on loans restructured within the last twelve months.