6. Loans Receivable and Allowance for Loan Losses

Set forth below is selected data relating to the composition of the loan portfolio at the dates indicated:

Types of loans

(dollars in thousands)

	March 31, 2012					December 31, 2011

Real Estate-Residential	$	148,983		31.1	%	$	148,148		32.3	%
Commercial		273,922		57.1			262,476		57.3
Construction		14,562		3.0			11,087		2.4
Commercial, financial and agricultural		28,506		5.9			22,684		5.0
Consumer loans to individuals		13,669		2.9			13,934		3.0
Total loans		479,642		100.0	%		458,329		100.0	%

Deferred fees (net)		(560	)				(422	)

Allowance for loan losses		(5,618	)				(5,458	)
Net loans receivable	$	473,464				$	452,449

Changes in the accretable yield for purchased credit-impaired loans were as follows for the three months ended March 31, 2012 (in thousands):

Balance at beginning of period	$	171
Accretion		(24	)
Reclassification and other		-
Balance at end of period	$	147

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):

	March 31, 2012		December 31, 2011
	Acquired Loans with Specific Evidence of Deterioration in Credit Quality		Acquired Loans with Specific Evidence of Deterioration in Credit Quality
Outstanding Balance	$	1,392	$	1,412
Carrying Amount		1,244		1,246

There were no material increases or decreases in the expected cash flows of these loans between May 31, 2011 (the "acquisition date") and March 31, 2012. There has been no allowance for loan losses recorded for acquired loans with or without specific evidence of deterioration in credit quality as of May 31, 2011 as well as those acquired without specific evidence of deterioration in credit quality as of March 31, 2012. In addition, there has been no allowance for loan losses reversed.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. Such system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probably that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. We do not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

A loan is considered to be a troubled debt restructuring ("TDR") loan when the Company grants a concession to the borrower because of the borrower's financial condition that it would not otherwise consider. Such concessions include the reduction of interest rates, forgiveness of principal or interest, or other modifications of interest rates that are less than the current market rate for new obligations with similar risk. TDR loans that are in compliance with their modified terms and that yield a market rate may be removed from the TDR status after a period of performance.

The following table shows the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:

	Real Estate Loans
	Residential		Commercial		Construction			Commercial Loans	Consumer Loans		Total
March 31, 2012	(In thousands)


Individually evaluated for impairment	$	-	$	12,655	$	-	$	385	$	-	$	13,040
Loans acquired with deteriorated credit quality	$	278	$	966	$	-	$	-	$	-	$	1,244
Collectively evaluated for impairment	$	148,705	$	260,301	$	14,562	$	28,121	$	13,669	$	465,358
Total Loans	$	148,983	$	273,922	$	14,562	$	28,506	$	13,669	$	479,642

	Real Estate Loans
	Residential		Commercial		Construction			Commercial Loans	Consumer Loans		Total
December 31, 2011	(In thousands)

Individually evaluated for impairment	$	-	$	11,786	$	-	$	598	$	-	$	12,384
Loans acquired with deteriorated credit quality	$	343	$	903	$	-	$	-	$	-	$	1,246
Collectively evaluated for impairment	$	147,805	$	249,787	$	11,087	$	22,086	$	13,934	$	444,699
Total Loans	$	148,148	$	262,476	$	11,087	$	22,684	$	13,934	$	458,329

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable. Also presented are the average recorded investments in the impaired loans and the related amount of interest recognized during the time within the period that the impaired loans were impaired.

	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
March 31, 2012 With no related allowance recorded:					(In thousands)
Real Estate Loans
Residential	$	278	$	306	$	-	$	296	$	1
Commercial		6,427		6,546		-		6,353		22
Commercial Loans		385		385		-		385		-
Total		7,090		7,237		-		7,034		23
With an allowance recorded:
Real Estate Loans
Commercial		7,194		7,194		1,073		6,844		53
Total		7,194		7,194		1,073		6,844		53
Total:
Real Estate loans
Residential		278		306		-		296		1
Commercial		13,621		13,740		1,073		13,197		75
Commercial Loans		385		385		-		385		-
Total Impaired Loans	$	14,284	$	14,431	$	1,073	$	13,878	$	76

	Recorded Investment		Unpaid Principal Balance		Associated Allowance		Average Recorded Investment		Interest Income Recognized
December 31, 2011 With no related allowance recorded:	(In thousands)
Real Estate Loans
Residential	$	343	$	385	$	-	$	245	$	7
Commercial		5,866		5,995		-		5,372		340
Commercial Loans		598		598		-		496		10
Total		6,807		6,978		-		6,113		357
With an allowance recorded:
Real Estate Loans
Commercial		6,823		6,823		1,231		9,670		204
Total		6,823		6,823		1,231		9,670		204
Total:
Real Estate loans
Residential		343		385		-		245		7
Commercial		12,689		12,818		1,231		15,042		544
Commercial Loans		598		598		-		496		10
Total Impaired Loans	$	13,630	$	13,801	$	1,231	$	15,783	$	561

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of March 31, 2012, troubled debt restructured loans totaled $7.2 million and resulted in specific reserves of $1.1 million. There were no defaults on restructured loans during the past twelve months. During 2012, there were no new loans identified as troubled debt restructurings. As of December 31, 2011, troubled debt restructured loans totaled $7.2 million and resulted in specific reserves of $1.2 million.

Management uses a seven point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first three categories are considered not criticized, and are aggregated as "Pass" rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Bank has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as non performance, repossession, or death occurs to raise awareness of a possible credit event. The Bank's Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $500,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of March 31, 2012 and December 31, 2011 (in thousands):

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
March 31, 2012
Commercial real estate loans	$	248,086	$	10,960	$	14,876	$	-	$	-	$	273,922
Commercial loans		27,651		409		446		-		-		28,506
Total	$	275,737	$	11,369	$	15,322	$	-	$	-	$	302,428

	Pass		Special Mention		Substandard		Doubtful		Loss		Total
December 31, 2011
Commercial real estate loans	$	237,407	$	11,009	$	14,060	$	-	$	-	$	262,476
Commercial loans		21,598		427		659		-		-		22,684
Total	$	259,005	$	11,436	$	14,719	$	-	$	-	$	285,160

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. The following table presents the recorded investment in the loan classes based on payment activity as of March 31, 2012 and December 31, 2011 (in thousands):

March 31, 2012	Performing		Nonperforming		Total
Residential real estate loans	$	146,530	$	2,453	$	148,983
Construction		14,562		-		14,562
Consumer loans		13,669		-		13,669
Total	$	174,761	$	2,453	$	177,214

December 31, 2011	Performing		Nonperforming		Total
Residential real estate loans	$	145,061	$	3,087	$	148,148
Construction		11,087		-		11,087
Consumer loans		13,934		-		13,934
Total	$	170,082	$	3,087	$	173,169

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio 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 aging categories of performing loans and nonaccrual loans as of March 31, 2012 and December 31, 2011 (in thousands):

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
March 31, 2012
Real Estate loans
Residential	$	145,821	$	178	$	531	$	-	$	2,453	$	3,162	$	148,983
Construction		14,556		6		-		-		-		6		14,562
Commercial		266,660		1,115		-		418		5,729		7,262		273,922
Commercial loans		28,121		-		-		-		385		385		28,506
Consumer loans		13,620		48		1		-		-		49		13,669
Total	$	468,778	$	1,347	$	532	$	418	$	8,567	$	10,864	$	479,642

	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
December 31, 2011
Real Estate loans
Residential	$	143,550	$	160	$	1,351	$	-	$	3,087	$	4,598	$	148,148
Construction		10,532		-		555		-		-		555		11,087
Commercial		255,613		1,015		1,524		-		4,324		6,863		262,476
Commercial loans		22,086		194		-		-		404		598		22,684
Consumer loans		13,835		89		10		-		-		99		13,934
Total	$	445,616	$	1,458	$	3,440	$	-	$	7,815	$	12,713	$	458,329

The following table presents the allowance for loan losses by the classes of the loan portfolio:

(In thousands)	Residential Real Estate			Commercial Real Estate			Construction		Commercial		Consumer			Total
Beginning balance, December 31, 2011	$	1,257		$	3,838		$	72	$	147	$	144		$	5,458
Charge Offs		(61	)		(103	)		-				(32	)		(196	)
Recoveries		1			-			-		-		5			6
Provision Expense		2			272			3		44		29			350
Ending balance, March 31, 2012	$	1,199			4,007			75		191		146			5,618
Ending balance individually evaluated for impairment	$	-			1,073			-		-		-			1,073
Ending balance collectively evaluated for impairment	$	1,199			2,934			75		191		146			4,545

(In thousands)	Residential Real Estate			Commercial Real Estate			Construction		Commercial			Consumer			Total
Beginning balance, December 31, 2010	$	1,167		$	3,976		$	110	$	171		$	192		$	5,616
Charge Offs		(37	)		(14	)		-		(2	)		(22	)		(75	)
Recoveries		2			-			-		5			12			19
Provision Expense		(14	)		124			1		139			(30	)		220
Ending balance, March 31, 2011	$	1,118			4,086			111		313			152			5,780
Ending balance individually evaluated for impairment	$	-			2,153			-		-			-			2,153
Ending balance collectively evaluated for impairment	$	1,118			1,933			111		313			152			3,627

The Company's primary business activity is with customers located in northeastern Pennsylvania. Accordingly, the Company has extended credit primarily to commercial entities and individuals in this area whose ability to honor their contracts is influenced by the region's economy.

As of March 31, 2012, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in the hospitality lodging industry and builders/contractors with loans outstanding of $46.6 million, or 53.5% of capital, to the hospitality lodging industry and $13.3 million, or 18.7% of capital, to builders/contractors. There were no losses recognized on loans to the hospitality industry or to builders/contractors during the current period.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $5,000 and $0 respectively, in the first three months of 2012 compared to $96,000 and $0, respectively, in the same period in 2011. The proceeds from the sales of residential mortgage loans totaled $129,000 and $4.7 million for the three months ended March 31, 2012 and 2011, respectively.