7. 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, 2013 December 31, 2012
Real Estate-Residential		$153,422	32.0%	$150,043	31.4%
Commercial		270,654	56.5	274,484	57.5
Construction		14,750	3.1	13,435	2.8
Commercial, financial and agricultural		26,443	5.5	25,113	5.3
Consumer loans to individuals		13,922	2.9	14,154	3.0
Total loans		479,191	100.0%	477,229	100.0%
Deferred fees, net		(528)		(519)
Total loans receivable		478,663		476,710
Allowance for loan losses		(5,726)		(5,502)
Net loans receivable		$472,937		$471,208

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

	2013	2012
Balance at beginning of period	$76	$171
Accretion	(23)	(24)
Reclassification and other	-	-
Balance at end of period	$53	$147

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

	March 31, 2013	December 31, 2012

Outstanding Balance	$1,102	$1,145
Carrying Amount	$1,049	$1,069

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, 2013. 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, 2013. 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.

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, 2013								(In thousands)

Individually evaluated for impairment	$	-		$	10,035		$	-	$	-	$		-	$	10,035
Loans acquired with deteriorated credit quality		253			796			-		-			-		1,049
Collectively evaluated for impairment	$	153,169		$	259,823		$	14,750	$	26,443	$		13,922	$	468,108
Total Loans	$	153,422	$			270,654	$	14,750	$	26,443	$	13,922		$	479,191


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

Individually evaluated for impairment	$	-		$	10,246		$	-	$	310	$		-	$	10,556
Loans acquired with deteriorated credit quality	$	270		$	799		$	-	$	-	$		-	$	1,069
Collectively evaluated for impairment	$	149,773		$	263,439		$	13,435	$	24,803	$		14,154	$	465,604
Total Loans	$	150,043		$	274,484		$	13,435	$	25,113	$		14,154	$	477,229

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
March 31, 2013 With no related allowance recorded:				(In thousands)
Real Estate Loans
Residential	$	253	$	265	$	-
Commercial		10,831		10,872		-
Subtotal		11,084		11,137		-
With an allowance recorded:
Subtotal		-		-		-
Total:
Real Estate loans
Residential		253		265		-
Commercial		10,831		10,872		-
Total Impaired Loans	$	11,084	$	11,137	$	-

		Recorded Investment		Unpaid Principal Balance		Associated Allowance
December 31, 2012 With no related allowance recorded:				(In thousands)
Real Estate Loans
Residential	$	270	$	286	$	-
Commercial		10,494		10,554		-
Commercial Loans		310		310		-
Subtotal		11,074		11,150		-
With an allowance recorded:
Real Estate Loans
Commercial		551		551		9
Subtotal		551		551		9
Total:
Real Estate loans
Residential		270		286		-
Commercial		11,045		11,105		9
Commercial Loans		310		310		-
Total Impaired Loans	$	11,625	$	11,701	$	9

The following information for impaired loans is presented for the periods ended March 31, 2013 and 2012:


	Average Recorded Investment		Interest Income Recognized
	2013	2012	2013	2012
Total:
Real Estate loans
Residential	$262	$296	$1	$1
Commercial	10,839	13,197	19	75
Commercial loans	-	385	-	-
Total Loans	$11,101	$13,878	$20	$76

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, 2013, troubled debt restructured loans totaled $5.3 million and had no specific reserves. During 2013, there were no new loans identified as troubled debt restructurings, nor were there any loan modifications classified as troubled debt restructurings that subsequently defaulted. As of December 31, 2012, troubled debt restructured loans totaled $5.6 million and resulted in specific reserves of $9,000. For the period ended March 31, 2012, there were no new loans identified as troubled debt restructurings, nor were there any loan modifications classified as troubled debt restructurings that subsequently defaulted.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four 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 Company'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, 2013 and December 31, 2012 (in thousands):

		Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2013
Commercial real estate loans	$	248,287	$	10,819	$	11,548	$	-	$	270,654
Commercial loans		26,443		-		-		-		26,443
Total	$	274,730	$	10,819	$	11,548	$	-	$	297,097


		Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2012
Commercial real estate loans	$	251,484	$	11,245	$	11,755	$	-	$	274,484
Commercial loans		24,427		318		368		-		25,113
Total	$	275,911	$	11,563	$	12,123	$	-	$	299,597

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, 2013 and December 31, 2012 (in thousands):

March 31, 2013		Performing		Nonperforming		Total
Residential real estate loans	$	150,800	$	2,622	$	153,422
Construction		14,750		-		14,750
Consumer loans		13,922		-		13,922
Total	$	179,472	$	2,622	$	182,094

December 31, 2012		Performing		Nonperforming		Total
Residential real estate loans	$	147,197	$	2,846	$	150,043
Construction		13,435		-		13,435
Consumer loans		14,154		-		14,154
Total	$	174,786	$	2,846	$	177,632

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, 2013 and December 31, 2012 (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, 2013
Real Estate loans
Residential	$	150,283	$	457	$	60	$	-	$	2,622	$	3,139	$	153,422
Commercial		259,838		856		-		-		9,960		10,816		270,654
Construction		14,683		67		-		-		-		67		14,750
Commercial loans		26,405		30		8		-		-		38		26,443
Consumer loans		13,878		35		9		-		-		44		13,922
Total	$	465,087	$	1,445	$	77	$	-	$	12,582	$	14,104	$	479,191
		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, 2012
Real Estate loans
Residential	$	146,847	$	94	$	256	$	-	$	2,846	$	3,196	$	150,043
Commercial		261,527		2,333		598		-		10,026		12,957		274,484
Construction		13,363		72		-		-		-		72		13,435
Commercial loans		24,785		-		-		-		328		328		25,113
Consumer loans		14,029		114		11		-		-		125		14,154
Total	$	460,551	$	2,613	$	865	$	-	$	13,200	$	16,678	$	477,229

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, 2012	$		1,797	$	3,183	$	119	$	223	$	180	$	5,502
Charge Offs			(250)		(313)		-		-		(19)		(582)	)
Recoveries			-		-		-		-		6		6
Provision Expense			427		420		5		(47)		(5)		800
Ending balance, March 31, 2013	$		1,974	$	3,290	$	124	$	176	$	162	$	5,726
Ending balance individually evaluated for impairment	$		-	$	-	$	-	$	-	$	-	$	-
Ending balance collectively evaluated for impairment	$		1,974	$	3,290	$	124	$	176	$	162	$	5,726

(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

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, 2013, the Company considered its concentration of credit risk to be acceptable. The highest concentrations are in the hospitality lodging industry, property owners associations and bars/restaurants with loans outstanding of $40.2 million, or 43.3% of capital, to the hospitality lodging industry, $10.8 million, or 11.6% of capital, to property owners associations, and $10.2 million, or 11.0% of capital, to bars/restaurants. There were no losses recognized on loans within these concentrations during the current period.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $18,000 and $7,000 respectively, in the first three months of 2013 compared to $5,000 and $0, respectively, in the same period in 2012. The proceeds from the sales of residential mortgage loans totaled $1.1 million and $128,000 for the three months ended March 31, 2013 and 2012, respectively.