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Loans and Allowance for Loan Losses | 6 Months Ended
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Jun. 30, 2013
Loans and Allowance for Loan Losses |
3. | Loans and Allowance for Loan Losses
The Company’s loan and allowance for loan loss policies are as follows: Loans are stated at unpaid principal balances, less net deferred loan fees and the allowance for loan losses. The Company grants real estate mortgage, commercial business and consumer loans. A substantial portion of the loan portfolio is represented by mortgage loans to customers in southern Indiana. The ability of the Company’s customers to honor their loan agreements is dependent upon the real estate and general economic conditions in this area. Loan origination and commitment fees, as well as certain direct costs of underwriting and closing loans, are deferred and amortized as a yield adjustment to interest income over the lives of the related loans using the interest method. Amortization of net deferred loan fees is discontinued when a loan is placed on nonaccrual status. The recognition of income on a loan is discontinued and previously accrued interest is reversed, when interest or principal payments become ninety (90) days past due unless, in the opinion of management, the outstanding interest remains collectible. Past due status is determined based on contractual terms. Generally, by applying the cash receipts method, interest income is subsequently recognized only as received until the loan is returned to accrual status. The cash receipts method is used when the likelihood of further loss on the loan is remote. Otherwise, the Company applies the cost recovery method and applies all payments as a reduction of the unpaid principal balance until the loan qualifies for return to accrual status. Interest income on impaired loans is recognized using the cost recovery method, unless the likelihood of further loss on the loan is remote. A loan is restored to accrual status when all principal and interest payments are brought current and the borrower has demonstrated the ability to make future payments of principal and interest as scheduled, which generally requires that the borrower demonstrate a period of performance of at least six consecutive months. For portfolio segments other than consumer loans, the Company’s practice is to charge-off any loan or portion of a loan when the loan is determined by management to be uncollectible due to the borrower’s failure to meet repayment terms, the borrower’s deteriorating or deteriorated financial condition, the depreciation of the underlying collateral, the loan’s classification as a loss by regulatory examiners, or for other reasons. A partial charge-off is recorded on a loan when the uncollectibility of a portion of the loan has been confirmed, such as when a loan is discharged in bankruptcy, the collateral is liquidated, a loan is restructured at a reduced principal balance, or other identifiable events that lead management to determine the full principal balance of the loan will not be repaid. A specific reserve is recognized as a component of the allowance for estimated losses on loans individually evaluated for impairment. Partial charge-offs on nonperforming and impaired loans are included in the Company’s historical loss experience used to estimate the general component of the allowance for loan losses as discussed below. Specific reserves are not considered charge-offs in management’s analysis of the allowance for loan losses because they are estimates and the outcome of the loan relationship is undetermined. At June 30, 2013, the Company had ten loans on which partial charge-offs of $489,000 had been recorded. Consumer loans not secured by real estate are typically charged off at 90 days past due, or earlier if deemed uncollectible, unless the loans are in the process of collection. Overdrafts are charged off after 45 days past due. Charge-offs are typically recorded on loans secured by real estate when the property is foreclosed upon. The allowance for loan losses reflects management’s judgment of probable loan losses inherent in the loan portfolio at the balance sheet date. Additions to the allowance for loan losses are made by the provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance. The Company uses a disciplined process and methodology to evaluate the allowance for loan losses on at least a quarterly basis that is based upon management’s periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of specific and general components. The specific component relates to loans that are individually evaluated for impairment or loans otherwise classified as doubtful, substandard, or special mention. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers non-classified loans and classified loans that are found, upon individual evaluation, to not be impaired. Such loans are pooled by segment and losses are modeled using annualized historical loss experience adjusted for qualitative factors. The historical loss experience is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent twelve calendar quarters unless the historical loss experience is not considered indicative of the level of risk in the remaining balance of a particular portfolio segment, in which case an adjustment is determined by management. The Company’s historical loss experience is then adjusted by an overall loss factor weighting adjustment based on a qualitative analysis prepared by management and reviewed on a quarterly basis. The overall loss factor considers changes in underwriting standards, economic conditions, changes and trends in past due and classified loans and other internal and external factors. Management also applies additional loss factor multiples to loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The loss factor multiples for classified loans are based on management’s assessment of historical trends regarding losses experienced on classified loans in prior periods. See below for additional discussion of the overall loss factor and loss factor multiples for classified loans as of June 30, 2013 and December 31, 2012, as well as a discussion of changes in management’s allowance for loan losses methodology from 2012 to 2013. Management exercises significant judgment in evaluating the relevant historical loss experience and the qualitative factors. Management also monitors the differences between estimated and actual incurred loan losses for loans considered impaired in order to evaluate the effectiveness of the estimation process and make any changes in the methodology as necessary. Management utilizes the following portfolio segments in its analysis of the allowance for loan losses: residential real estate, land, construction, commercial real estate, commercial business, home equity and second mortgage, and other consumer loans. Additional discussion of the portfolio segments and the risks associated with each segment can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis by either 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. Values for collateral dependent loans are generally based on appraisals obtained from independent licensed real estate appraisers, with adjustments applied for estimated costs to sell the property, costs to complete unfinished or repair damaged property and other factors. New appraisals are generally obtained for all significant properties when a loan is identified as impaired, and a property is considered significant if the value of the property is estimated to exceed $200,000. Subsequent appraisals are obtained as needed or if management believes there has been a significant change in the market value of the property. In instances where it is not deemed necessary to obtain a new appraisal, management bases its impairment and allowance for loan loss analysis on the original appraisal with adjustments for current conditions based on management’s assessment of market factors and management’s inspection of the property. Loans at June 30, 2013 and December 31, 2012 consisted of the following:
|  | June 30, |  |  | December 31, |
(In thousands) |  | 2013 |  |  | 2012 |
Real estate mortgage loans: |  |  |  |  |  |  |  |
Residential |  | $ | 107,773 |  |  | $ | 108,097 |
Land |  |  | 10,155 |  |  |  | 9,607 |
Residential construction |  |  | 14,823 |  |  |  | 12,753 |
Commercial real estate |  |  | 70,306 |  |  |  | 68,731 |
Commercial real estate construction |  |  | 3,135 |  |  |  | 3,299 |
Commercial business loans |  |  | 21,395 |  |  |  | 18,612 |
Consumer loans: |  |  |  |  |  |  |  |
Home equity and second mortgage loans |  |  | 33,821 |  |  |  | 36,962 |
Automobile loans |  |  | 23,113 |  |  |  | 21,922 |
Loans secured by savings accounts |  |  | 1,042 |  |  |  | 770 |
Unsecured loans |  |  | 3,134 |  |  |  | 3,191 |
Other consumer loans |  |  | 4,933 |  |  |  | 5,303 |
Gross loans |  |  | 293,630 |  |  |  | 289,247 |
Deferred loan origination fees, net |  |  | 255 |  |  |  | 202 |
Undisbursed portion of loans in process |  |  | (5,890 | ) |  |  | (4,306 | )
Allowance for loan losses |  |  | (4,835 | ) |  |  | (4,736 | )
Loans, net |  | $ | 283,160 |  |  | $ | 280,407 |
The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at June 30, 2013:
|  | Residential Real Estate |  |  | Land |  |  | Construction |  |  | Commercial Real Estate |  |  | Commercial Business |  |  | Home Equity & 2nd Mtg |  |  | Other Consumer |  |  | Total |
|  | (In thousands) |
Recorded Investment in Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal loan balance |  | $ | 107,773 |  |  | $ | 10,155 |  |  | $ | 12,068 |  |  | $ | 70,306 |  |  | $ | 21,395 |  |  | $ | 33,821 |  |  | $ | 32,222 |  |  | $ | 287,740 |
Accrued interest receivable |  |  | 418 |  |  |  | 52 |  |  |  | 27 |  |  |  | 186 |  |  |  | 54 |  |  |  | 118 |  |  |  | 159 |  |  |  | 1,014 |
Net deferred loan origination fees and costs |  |  | 58 |  |  |  | 3 |  |  |  | (12 | ) |  |  | (23 | ) |  |  | (9 | ) |  |  | 238 |  |  |  | 0 |  |  |  | 255 |
Recorded investment in loans |  | $ | 108,249 |  |  | $ | 10,210 |  |  | $ | 12,083 |  |  | $ | 70,469 |  |  | $ | 21,440 |  |  | $ | 34,177 |  |  | $ | 32,381 |  |  | $ | 289,009 |
Recorded Investment in Loans as Evaluated for Impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 1,821 |  |  | $ | 127 |  |  | $ | 203 |  |  | $ | 1,127 |  |  | $ | 1,776 |  |  | $ | 325 |  |  | $ | 0 |  |  | $ | 5,379 |
Collectively evaluated for impairment |  |  | 106,428 |  |  |  | 10,083 |  |  |  | 11,880 |  |  |  | 69,342 |  |  |  | 19,664 |  |  |  | 33,852 |  |  |  | 32,381 |  |  |  | 283,630 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 108,249 |  |  | $ | 10,210 |  |  | $ | 12,083 |  |  | $ | 70,469 |  |  | $ | 21,440 |  |  | $ | 34,177 |  |  | $ | 32,381 |  |  | $ | 289,009 |
The following table provides the components of the Company’s recorded investment in loans for each portfolio segment at December 31, 2012:
|  | Residential Real Estate |  |  | Land |  |  | Construction |  |  | Commercial Real Estate |  |  | Commercial Business |  |  | Home Equity & 2nd Mtg |  |  | Other Consumer |  |  | Total |
|  | (In thousands) |
Recorded Investment in Loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Principal loan balance |  | $ | 108,097 |  |  | $ | 9,607 |  |  | $ | 11,746 |  |  | $ | 68,731 |  |  | $ | 18,612 |  |  | $ | 36,962 |  |  | $ | 31,186 |  |  | $ | 284,941 |
Accrued interest receivable |  |  | 444 |  |  |  | 48 |  |  |  | 29 |  |  |  | 188 |  |  |  | 53 |  |  |  | 147 |  |  |  | 184 |  |  |  | 1,093 |
Net deferred loan origination fees and costs |  |  | 62 |  |  |  | 2 |  |  |  | (12 | ) |  |  | (17 | ) |  |  | (10 | ) |  |  | 177 |  |  |  | 0 |  |  |  | 202 |
Recorded investment in loans |  | $ | 108,603 |  |  | $ | 9,657 |  |  | $ | 11,763 |  |  | $ | 68,902 |  |  | $ | 18,655 |  |  | $ | 37,286 |  |  | $ | 31,370 |  |  | $ | 286,236 |
Recorded Investment in Loans as Evaluated for Impairment: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 2,370 |  |  | $ | 125 |  |  | $ | 403 |  |  | $ | 2,836 |  |  | $ | 1,776 |  |  | $ | 73 |  |  | $ | 0 |  |  | $ | 7,583 |
Collectively evaluated for impairment |  |  | 106,233 |  |  |  | 9,532 |  |  |  | 11,360 |  |  |  | 66,066 |  |  |  | 16,879 |  |  |  | 37,213 |  |  |  | 31,370 |  |  |  | 278,653 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 108,603 |  |  | $ | 9,657 |  |  | $ | 11,763 |  |  | $ | 68,902 |  |  | $ | 18,655 |  |  | $ | 37,286 |  |  | $ | 31,370 |  |  | $ | 286,236 |
An analysis of the allowance for loan losses as of June 30, 2013 is as follows:
|  | Residential Real Estate |  |  | Land |  |  | Construction |  |  | Commercial Real Estate |  |  | Commercial Business |  |  | Home Equity & 2nd Mtg |  |  | Other Consumer |  |  | Total |
|  | (In thousands) |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 93 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 164 |  |  | $ | 1,065 |  |  | $ | 25 |  |  | $ | 0 |  |  | $ | 1,347 |
Collectively evaluated for impairment |  |  | 812 |  |  |  | 73 |  |  |  | 60 |  |  |  | 1,127 |  |  |  | 195 |  |  |  | 869 |  |  |  | 352 |  |  |  | 3,488 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 905 |  |  | $ | 73 |  |  | $ | 60 |  |  | $ | 1,291 |  |  | $ | 1,260 |  |  | $ | 894 |  |  | $ | 352 |  |  | $ | 4,835 |
An analysis of the allowance for loan losses as of December 31, 2012 is as follows:
|  | Residential Real Estate |  |  | Land |  |  | Construction |  |  | Commercial Real Estate |  |  | Commercial Business |  |  | Home Equity & 2nd Mtg |  |  | Other Consumer |  |  | Total |
|  | (In thousands) |
Ending allowance balance attributable to loans: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Individually evaluated for impairment |  | $ | 213 |  |  | $ | 0 |  |  | $ | 0 |  |  | $ | 275 |  |  | $ | 1,098 |  |  | $ | 66 |  |  | $ | 0 |  |  | $ | 1,652 |
Collectively evaluated for impairment |  |  | 709 |  |  |  | 71 |  |  |  | 0 |  |  |  | 1,035 |  |  |  | 125 |  |  |  | 853 |  |  |  | 291 |  |  |  | 3,084 |
Acquired with deteriorated credit quality |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 922 |  |  | $ | 71 |  |  | $ | 0 |  |  | $ | 1,310 |  |  | $ | 1,223 |  |  | $ | 919 |  |  | $ | 291 |  |  | $ | 4,736 |
An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2013 is as follows:
|  | Residential Real Estate |  |  | Land |  |  | Construction |  |  | Commercial Real Estate |  |  | Commercial Business |  |  | Home Equity & 2nd Mtg |  |  | Other Consumer |  |  | Total |
|  | (In thousands) |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Changes in Allowance for Loan Losses for the three-months ended June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 940 |  |  | $ | 69 |  |  | $ | 50 |  |  | $ | 1,291 |  |  | $ | 1,226 |  |  | $ | 886 |  |  | $ | 330 |  |  | $ | 4,792 |
Provisions for loan losses |  |  | 24 |  |  |  | 6 |  |  |  | 10 |  |  |  | 89 |  |  |  | 33 |  |  |  | 9 |  |  |  | 54 |  |  |  | 225 |
Charge-offs |  |  | (99 | ) |  |  | (2 | ) |  |  | 0 |  |  |  | (89 | ) |  |  | 0 |  |  |  | (21 | ) |  |  | (65 | ) |  |  | (276 | )
Recoveries |  |  | 40 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1 |  |  |  | 20 |  |  |  | 33 |  |  |  | 94 |
Ending balance |  | $ | 905 |  |  | $ | 73 |  |  | $ | 60 |  |  | $ | 1,291 |  |  | $ | 1,260 |  |  | $ | 894 |  |  | $ | 352 |  |  | $ | 4,835 |
Changes in Allowance for Loan Losses for the six-months ended June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 922 |  |  | $ | 71 |  |  | $ | 0 |  |  | $ | 1,310 |  |  | $ | 1,223 |  |  | $ | 919 |  |  | $ | 291 |  |  | $ | 4,736 |
Provisions for loan losses |  |  | 236 |  |  |  | 4 |  |  |  | 60 |  |  |  | 56 |  |  |  | (13 | ) |  |  | (24 | ) |  |  | 156 |  |  |  | 475 |
Charge-offs |  |  | (297 | ) |  |  | (2 | ) |  |  | 0 |  |  |  | (89 | ) |  |  | 0 |  |  |  | (35 | ) |  |  | (171 | ) |  |  | (594 | )
Recoveries |  |  | 44 |  |  |  | 0 |  |  |  | 0 |  |  |  | 14 |  |  |  | 50 |  |  |  | 34 |  |  |  | 76 |  |  |  | 218 |
Ending balance |  | $ | 905 |  |  | $ | 73 |  |  | $ | 60 |  |  | $ | 1,291 |  |  | $ | 1,260 |  |  | $ | 894 |  |  | $ | 352 |  |  | $ | 4,835 |
An analysis of the changes in the allowance for loan losses for the three months and six months ended June 30, 2012 is as follows:
|  | Residential |  |  |  |  |  |  |  |  | Commercial |  |  | Commercial |  |  | Home Equity & |  |  | Other |  |  |  |
|  | Real Estate |  |  | Land |  |  | Construction |  |  | Real Estate |  |  | Business |  |  | 2nd Mtg |  |  | Consumer |  |  | Total |
|  | (In thousands) |
Allowance for loan losses: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Changes in Allowance for Loan Losses for the three-months ended June 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 1,060 |  |  | $ | 99 |  |  | $ | 35 |  |  | $ | 924 |  |  | $ | 1,175 |  |  | $ | 651 |  |  | $ | 284 |  |  | $ | 4,228 |
Provisions for loan losses |  |  | 147 |  |  |  | 3 |  |  |  | 5 |  |  |  | (98 | ) |  |  | (22 | ) |  |  | 246 |  |  |  | 19 |  |  |  | 300 |
Charge-offs |  |  | (35 | ) |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | (62 | ) |  |  | (55 | ) |  |  | (152 | )
Recoveries |  |  | 1 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1 |  |  |  | 5 |  |  |  | 49 |  |  |  | 56 |
Ending balance |  | $ | 1,173 |  |  | $ | 102 |  |  | $ | 40 |  |  | $ | 826 |  |  | $ | 1,154 |  |  | $ | 840 |  |  | $ | 297 |  |  | $ | 4,432 |
Changes in Allowance for Loan Losses for the six-months ended June 30, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Beginning balance |  | $ | 828 |  |  | $ | 93 |  |  | $ | 33 |  |  | $ | 1,269 |  |  | $ | 1,160 |  |  | $ | 400 |  |  | $ | 399 |  |  | $ | 4,182 |
Provisions for loan losses |  |  | 646 |  |  |  | 12 |  |  |  | 7 |  |  |  | (443 | ) |  |  | (10 | ) |  |  | 607 |  |  |  | (44 | ) |  |  | 775 |
Charge-offs |  |  | (312 | ) |  |  | (4 | ) |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | (176 | ) |  |  | (146 | ) |  |  | (638 | )
Recoveries |  |  | 11 |  |  |  | 1 |  |  |  | 0 |  |  |  | 0 |  |  |  | 4 |  |  |  | 9 |  |  |  | 88 |  |  |  | 113 |
Ending balance |  | $ | 1,173 |  |  | $ | 102 |  |  | $ | 40 |  |  | $ | 826 |  |  | $ | 1,154 |  |  | $ | 840 |  |  | $ | 297 |  |  | $ | 4,432 |
During the six months ended June 30, 2013, management increased the overall qualitative factor for each portfolio segment from 1.15 times the Company’s historical loss factors to 1.18 times the Company’s historical loss factors. The increase in the overall qualitative factor was based on management’s analysis of changes and trends in the following qualitative factors:
| • |  | Underwriting Standards – Management reviews the findings of periodic internal audit loan reviews, independent outsourced loan reviews and loan reviews performed by the banking regulators to evaluate the risk associated with changes in underwriting standards. At June 30, 2013 and December 31, 2012, management assessed the risk associated with this component as neutral, requiring no adjustment to the historical loss factors.
| • |  | Economic Conditions – Management analyzes trends in housing and unemployment data in the Harrison, Floyd, Washington and Clark counties of Indiana, the Company’s primary market area, to evaluate the risk associated with economic conditions. Due to a decrease in new home construction and an increase in unemployment in the Company’s primary market area, management assigned a risk factor of 1.20 for this component at June 30, 2013 and December 31, 2012.
| • |  | Past Due Loans – Management analyzes trends in past due loans for the Company to evaluate the risk associated with delinquent loans. In general, past due loan ratios have remained at elevated levels compared to historical amounts since 2007, and management assigned a risk factor of 1.20 for this component at June 30, 2013 and December 31, 2012.
| • |  | Other Internal and External Factors – This component includes management’s consideration of other qualitative factors such as loan portfolio composition. The Company has focused on the origination of commercial business and real estate loans in an effort to convert the Company’s balance sheet from that of a traditional thrift institution to a commercial bank. In addition, the Company has increased its investment in mortgage loans in which it does not hold a first lien position. Commercial loans and second mortgage loans generally entail greater credit risk than residential mortgage loans secured by a first lien. As a result of changes in the loan portfolio composition and other factors, management increased its risk factor from 1.20 at December 31, 2012 to 1.30 at June 30, 2013.
Each of the four factors above was assigned an equal weight to arrive at an average for the overall qualitative factor of 1.18 and 1.15 at June 30, 2013 and December 31, 2012, respectively. The effect of the overall qualitative factor was to increase the estimated allowance for loan losses by $476,000 and $419,000 at June 30, 2013 and December 31, 2012, respectively. The effect of the increase in the overall qualitative factor from 1.15 at December 31, 2012 to 1.18 at June 30, 2013 was to increase the estimated allowance for loan losses by approximately $74,000. Management also adjusts the historical loss factors for loans classified as watch, special mention and substandard that are not individually evaluated for impairment. The adjustments consider the increased likelihood of loss on classified loans based on the Company’s separate historical experience for classified loans. The effect of the adjustments for classified loans was to increase the estimated allowance for loan losses by $590,000 and $664,000 at June 30, 2013 and December 31, 2012, respectively. The following table summarizes the Company’s impaired loans as of June 30, 2013 and for the three months and six months ended June 30, 2013:
|  | At June 30, 2013 |  |  | Three Months Ended June 30, 2013 |  |  | Six Months Ended June 30, 2013 |
|  |  |  |  | Unpaid |  |  |  |  |  | Average |  |  | Interest |  |  | Interest |  |  | Average |  |  | Interest |  |  | Interest |
|  | Recorded |  |  | Principal |  |  | Related |  |  | Recorded |  |  | Income |  |  | Recognized - |  |  | Recorded |  |  | Income |  |  | Recognized - |
|  | Investment |  |  | Balance |  |  | Allowance |  |  | Investment |  |  | Recognized |  |  | Cash Method |  |  | Investment |  |  | Recognized |  |  | Cash Method |
|  | (In thousands) |
Loans with no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 1,181 |  |  | $ | 1,453 |  |  | $ | 0 |  |  | $ | 1,273 |  |  | $ | 2 |  |  | $ | 0 |  |  | $ | 1,324 |  |  | $ | 5 |  |  | $ | 1 |
Land |  |  | 127 |  |  |  | 134 |  |  |  | 0 |  |  |  | 126 |  |  |  | 0 |  |  |  | 0 |  |  |  | 125 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 203 |  |  |  | 217 |  |  |  | 0 |  |  |  | 232 |  |  |  | 0 |  |  |  | 0 |  |  |  | 289 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 139 |  |  |  | 141 |  |  |  | 0 |  |  |  | 106 |  |  |  | 0 |  |  |  | 0 |  |  |  | 582 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 4 |  |  |  | 3 |  |  |  | 0 |  |  |  | 4 |  |  |  | 3 |
Home Equity/2nd mortgage |  |  | 260 |  |  |  | 262 |  |  |  | 0 |  |  |  | 251 |  |  |  | 1 |  |  |  | 1 |  |  |  | 167 |  |  |  | 2 |  |  |  | 1 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 1,910 |  |  |  | 2,207 |  |  |  | 0 |  |  |  | 1,988 |  |  |  | 7 |  |  |  | 4 |  |  |  | 2,487 |  |  |  | 11 |  |  |  | 5 |
Loans with an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 640 |  |  |  | 790 |  |  |  | 93 |  |  |  | 625 |  |  |  | 0 |  |  |  | 0 |  |  |  | 731 |  |  |  | 0 |  |  |  | 0 |
Land |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 988 |  |  |  | 1,063 |  |  |  | 164 |  |  |  | 1,161 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,208 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 1,776 |  |  |  | 1,909 |  |  |  | 1,065 |  |  |  | 1,776 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,776 |  |  |  | 0 |  |  |  | 0 |
Home Equity/2nd mortgage |  |  | 65 |  |  |  | 66 |  |  |  | 25 |  |  |  | 49 |  |  |  | 0 |  |  |  | 0 |  |  |  | 57 |  |  |  | 1 |  |  |  | 0 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 3,469 |  |  |  | 3,828 |  |  |  | 1,347 |  |  |  | 3,614 |  |  |  | 0 |  |  |  | 0 |  |  |  | 3,774 |  |  |  | 1 |  |  |  | 0 |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 1,821 |  |  |  | 2,243 |  |  |  | 93 |  |  |  | 1,898 |  |  |  | 2 |  |  |  | 0 |  |  |  | 2,055 |  |  |  | 5 |  |  |  | 1 |
Land |  |  | 127 |  |  |  | 134 |  |  |  | 0 |  |  |  | 129 |  |  |  | 0 |  |  |  | 0 |  |  |  | 127 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 203 |  |  |  | 217 |  |  |  | 0 |  |  |  | 232 |  |  |  | 0 |  |  |  | 0 |  |  |  | 289 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 1,127 |  |  |  | 1,204 |  |  |  | 164 |  |  |  | 1,267 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,790 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 1,776 |  |  |  | 1,909 |  |  |  | 1,065 |  |  |  | 1,776 |  |  |  | 4 |  |  |  | 3 |  |  |  | 1,776 |  |  |  | 4 |  |  |  | 3 |
Home Equity/2nd mortgage |  |  | 325 |  |  |  | 328 |  |  |  | 25 |  |  |  | 300 |  |  |  | 1 |  |  |  | 1 |  |  |  | 224 |  |  |  | 3 |  |  |  | 1 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  | $ | 5,379 |  |  | $ | 6,035 |  |  | $ | 1,347 |  |  | $ | 5,602 |  |  | $ | 7 |  |  | $ | 4 |  |  | $ | 6,261 |  |  | $ | 12 |  |  | $ | 5 |
The following table summarizes the Company’s impaired loans for the three months and six months ended June 30, 2012:
|  | Three Months Ended June 30, 2012 |  |  | Six Months Ended June 30, 2012 |
|  | Average |  |  | Interest |  |  | Interest |  |  | Average |  |  | Interest |  |  | Interest |
|  | Recorded |  |  | Income |  |  | Recognized - |  |  | Recorded |  |  | Income |  |  | Recognized - |
|  | Investment |  |  | Recognized |  |  | Cash Method |  |  | Investment |  |  | Recognized |  |  | Cash Method |
Loans with no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 1,202 |  |  | $ | 0 |  |  | $ | 1 |  |  | $ | 1,184 |  |  | $ | 1 |  |  | $ | 1 |
Land |  |  | 41 |  |  |  | 0 |  |  |  | 0 |  |  |  | 29 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 266 |  |  |  | 0 |  |  |  | 0 |  |  |  | 259 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 1,244 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,234 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Home Equity/2nd mortgage |  |  | 85 |  |  |  | 1 |  |  |  | 0 |  |  |  | 86 |  |  |  | 2 |  |  |  | 1 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 2,838 |  |  |  | 1 |  |  |  | 1 |  |  |  | 2,792 |  |  |  | 3 |  |  |  | 2 |
Loans with an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 1,017 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,055 |  |  |  | 0 |  |  |  | 0 |
Land |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 1,502 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,547 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 1,885 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,899 |  |  |  | 0 |  |  |  | 0 |
Home Equity/2nd mortgage |  |  | 171 |  |  |  | 0 |  |  |  | 1 |  |  |  | 114 |  |  |  | 0 |  |  |  | 1 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 4,575 |  |  |  | 0 |  |  |  | 1 |  |  |  | 4,615 |  |  |  | 0 |  |  |  | 1 |
Total: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 2,219 |  |  |  | 0 |  |  |  | 1 |  |  |  | 2,239 |  |  |  | 1 |  |  |  | 1 |
Land |  |  | 41 |  |  |  | 0 |  |  |  | 0 |  |  |  | 29 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 266 |  |  |  | 0 |  |  |  | 0 |  |  |  | 259 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 2,746 |  |  |  | 0 |  |  |  | 0 |  |  |  | 2,781 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 1,885 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,899 |  |  |  | 0 |  |  |  | 0 |
Home Equity/2nd mortgage |  |  | 256 |  |  |  | 1 |  |  |  | 1 |  |  |  | 200 |  |  |  | 2 |  |  |  | 2 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  | $ | 7,413 |  |  | $ | 1 |  |  | $ | 2 |  |  | $ | 7,407 |  |  | $ | 3 |  |  | $ | 3 |
The following table summarizes the Company’s impaired loans as of December 31, 2012:
|  |  |  |  | Unpaid |  |  |  |
|  | Recorded |  |  | Principal |  |  | Related |
|  | Investment |  |  | Balance |  |  | Allowance |
|  | (In thousands) |
Loans with no related allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential |  | $ | 1,427 |  |  | $ | 1,760 |  |  | $ | 0 |
Land |  |  | 125 |  |  |  | 126 |  |  |  | 0 |
Construction |  |  | 403 |  |  |  | 413 |  |  |  | 0 |
Commercial real estate |  |  | 1,535 |  |  |  | 1,944 |  |  |  | 0 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
HE/2nd mortgage |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 3,490 |  |  |  | 4,243 |  |  |  | 0 |
Loans with an allowance recorded: |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 943 |  |  |  | 1,020 |  |  |  | 213 |
Land |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 1,301 |  |  |  | 1,394 |  |  |  | 275 |
Commercial business |  |  | 1,776 |  |  |  | 1,909 |  |  |  | 1,098 |
HE/2nd mortgage |  |  | 73 |  |  |  | 73 |  |  |  | 66 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  |  | 4,093 |  |  |  | 4,396 |  |  |  | 1,652 |
Total: |  |  |  |  |  |  |  |  |  |  |  |
Residential |  |  | 2,370 |  |  |  | 2,780 |  |  |  | 213 |
Land |  |  | 125 |  |  |  | 126 |  |  |  | 0 |
Construction |  |  | 403 |  |  |  | 413 |  |  |  | 0 |
Commercial real estate |  |  | 2,836 |  |  |  | 3,338 |  |  |  | 275 |
Commercial business |  |  | 1,776 |  |  |  | 1,909 |  |  |  | 1,098 |
Home Equity/2nd mortgage |  |  | 73 |  |  |  | 73 |  |  |  | 66 |
Other consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
|  | $ | 7,583 |  |  | $ | 8,639 |  |  | $ | 1,652 |
Nonperforming loans consists of nonaccrual loans and loans over 90 days past due and still accruing interest. The following table presents the recorded investment in nonperforming loans at June 30, 2013 and December 31, 2012:
|  | June 30, 2013 |  |  | December 31, 2012 |
|  |  |  |  | Loans 90+ Days |  |  | Total |  |  |  |  |  | Loans 90+ Days |  |  | Total |
|  | Nonaccrual |  |  | Past Due |  |  | Nonperforming |  |  | Nonaccrual |  |  | Past Due |  |  | Nonperforming |
|  | Loans |  |  | Still Accruing |  |  | Loans |  |  | Loans |  |  | Still Accruing |  |  | Loans |
|  | (In thousands) |
Residential |  | $ | 1,821 |  |  | $ | 140 |  |  | $ | 1,961 |  |  | $ | 2,370 |  |  | $ | 215 |  |  | $ | 2,585 |
Land |  |  | 127 |  |  |  | 0 |  |  |  | 127 |  |  |  | 125 |  |  |  | 0 |  |  |  | 125 |
Construction |  |  | 203 |  |  |  | 0 |  |  |  | 203 |  |  |  | 403 |  |  |  | 0 |  |  |  | 403 |
Commercial real estate |  |  | 1,127 |  |  |  | 0 |  |  |  | 1,127 |  |  |  | 2,836 |  |  |  | 0 |  |  |  | 2,836 |
Commercial business |  |  | 1,776 |  |  |  | 237 |  |  |  | 2,013 |  |  |  | 1,776 |  |  |  | 0 |  |  |  | 1,776 |
Home Equity/2nd mortgage |  |  | 325 |  |  |  | 96 |  |  |  | 421 |  |  |  | 73 |  |  |  | 56 |  |  |  | 129 |
Other consumer |  |  | 0 |  |  |  | 9 |  |  |  | 9 |  |  |  | 0 |  |  |  | 18 |  |  |  | 18 |
Total |  | $ | 5,379 |  |  | $ | 482 |  |  | $ | 5,861 |  |  | $ | 7,583 |  |  | $ | 289 |  |  | $ | 7,872 |
The following table presents the aging of the recorded investment loans at June 30, 2013:
|  | 30-59 Days |  |  | 60-89 Days |  |  | Over 90 Days |  |  | Total |  |  |  |  |  | Total |
|  | Past Due |  |  | Past Due |  |  | Past Due |  |  | Past Due |  |  | Current |  |  | Loans |
|  | (In thousands) |
Residential |  | $ | 4,871 |  |  | $ | 615 |  |  | $ | 1,453 |  |  | $ | 6,939 |  |  | $ | 101,310 |  |  | $ | 108,249 |
Land |  |  | 277 |  |  |  | 51 |  |  |  | 123 |  |  |  | 451 |  |  |  | 9,759 |  |  |  | 10,210 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 109 |  |  |  | 109 |  |  |  | 11,974 |  |  |  | 12,083 |
Commercial real estate |  |  | 94 |  |  |  | 71 |  |  |  | 122 |  |  |  | 287 |  |  |  | 70,182 |  |  |  | 70,469 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 237 |  |  |  | 237 |  |  |  | 21,203 |  |  |  | 21,440 |
Home Equity/2nd mortgage |  |  | 728 |  |  |  | 14 |  |  |  | 340 |  |  |  | 1,082 |  |  |  | 33,095 |  |  |  | 34,177 |
Other consumer |  |  | 341 |  |  |  | 205 |  |  |  | 9 |  |  |  | 555 |  |  |  | 31,826 |  |  |  | 32,381 |
Total |  | $ | 6,311 |  |  | $ | 956 |  |  | $ | 2,393 |  |  | $ | 9,660 |  |  | $ | 279,349 |  |  | $ | 289,009 |
The following table presents the aging of the recorded investment in loans at December 31, 2012:
|  | 30-59 Days |  |  | 60-89 Days |  |  | Over 90 Days |  |  | Total |  |  |  |  |  | Total |
|  | Past Due |  |  | Past Due |  |  | Past Due |  |  | Past Due |  |  | Current |  |  | Loans |
|  | (In thousands) |
Residential |  | $ | 4,085 |  |  | $ | 871 |  |  | $ | 1,644 |  |  | $ | 6,600 |  |  | $ | 102,003 |  |  | $ | 108,603 |
Land |  |  | 343 |  |  |  | 0 |  |  |  | 119 |  |  |  | 462 |  |  |  | 9,195 |  |  |  | 9,657 |
Construction |  |  | 171 |  |  |  | 0 |  |  |  | 113 |  |  |  | 284 |  |  |  | 11,479 |  |  |  | 11,763 |
Commercial real estate |  |  | 360 |  |  |  | 0 |  |  |  | 335 |  |  |  | 695 |  |  |  | 68,207 |  |  |  | 68,902 |
Commercial business |  |  | 36 |  |  |  | 0 |  |  |  | 0 |  |  |  | 36 |  |  |  | 18,619 |  |  |  | 18,655 |
Home Equity/2nd mortgage |  |  | 1,206 |  |  |  | 102 |  |  |  | 97 |  |  |  | 1,405 |  |  |  | 35,881 |  |  |  | 37,286 |
Other consumer |  |  | 510 |  |  |  | 30 |  |  |  | 18 |  |  |  | 558 |  |  |  | 30,812 |  |  |  | 31,370 |
Total |  | $ | 6,711 |  |  | $ | 1,003 |  |  | $ | 2,326 |  |  | $ | 10,040 |  |  | $ | 276,196 |  |  | $ | 286,236 |
The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, public information, historical payment experience, credit documentation, and current economic trends, among other factors. The Company classifies loans based on credit risk at least quarterly. The Company uses the following regulatory definitions for risk ratings: Special Mention: Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Substandard: Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Doubtful: Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss: Loans classified as loss are considered uncollectible and of such little value that their continuance on the institution’s books as an asset is not warranted. Loans not meeting the criteria above that are analyzed individually as part of the described process are considered to be pass rated loans. The following table presents the recorded investment in loans by risk category as of the date indicated:
|  | Residential |  |  |  |  |  |  |  |  | Commercial |  |  | Commercial |  |  | Home Equity & |  |  | Other |  |  |  |
|  | Real Estate |  |  | Land |  |  | Construction |  |  | Real Estate |  |  | Business |  |  | 2nd Mtg |  |  | Consumer |  |  | Total |
|  | (In thousands) |
June 30, 2013 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 103,950 |  |  | $ | 6,782 |  |  | $ | 11,880 |  |  | $ | 68,218 |  |  | $ | 18,344 |  |  | $ | 33,362 |  |  | $ | 32,361 |  |  | $ | 274,897 |
Special Mention |  |  | 777 |  |  |  | 0 |  |  |  | 0 |  |  |  | 499 |  |  |  | 907 |  |  |  | 256 |  |  |  | 14 |  |  |  | 2,453 |
Substandard |  |  | 1,701 |  |  |  | 3,301 |  |  |  | 0 |  |  |  | 625 |  |  |  | 413 |  |  |  | 234 |  |  |  | 6 |  |  |  | 6,280 |
Doubtful |  |  | 1,821 |  |  |  | 127 |  |  |  | 203 |  |  |  | 1,127 |  |  |  | 1,776 |  |  |  | 325 |  |  |  | 0 |  |  |  | 5,379 |
Loss |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 108,249 |  |  | $ | 10,210 |  |  | $ | 12,083 |  |  | $ | 70,469 |  |  | $ | 21,440 |  |  | $ | 34,177 |  |  | $ | 32,381 |  |  | $ | 289,009 |
December 31, 2012 |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Pass |  | $ | 102,618 |  |  | $ | 7,220 |  |  | $ | 11,244 |  |  | $ | 63,095 |  |  | $ | 15,026 |  |  | $ | 36,035 |  |  | $ | 31,302 |  |  | $ | 266,540 |
Special Mention |  |  | 958 |  |  |  | 17 |  |  |  | 116 |  |  |  | 1,018 |  |  |  | 1,354 |  |  |  | 553 |  |  |  | 25 |  |  |  | 4,041 |
Substandard |  |  | 2,657 |  |  |  | 2,295 |  |  |  | 0 |  |  |  | 1,953 |  |  |  | 499 |  |  |  | 625 |  |  |  | 43 |  |  |  | 8,072 |
Doubtful |  |  | 2,370 |  |  |  | 125 |  |  |  | 403 |  |  |  | 2,836 |  |  |  | 1,776 |  |  |  | 73 |  |  |  | 0 |  |  |  | 7,583 |
Loss |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Ending balance |  | $ | 108,603 |  |  | $ | 9,657 |  |  | $ | 11,763 |  |  | $ | 68,902 |  |  | $ | 18,655 |  |  | $ | 37,286 |  |  | $ | 31,370 |  |  | $ | 286,236 |
The following table summarizes the Company’s troubled debt restructurings (TDRs) by accrual status as of June 30, 2013 and December 31, 2012:
|  | June 30, 2013 |  |  | December 31, 2012 |
|  |  |  |  |  |  |  |  |  |  | Related Allowance |  |  |  |  |  |  |  |  |  |  |  | Related Allowance |
|  | Accruing |  |  | Nonaccrual |  |  | Total |  |  | for Loan Losses |  |  | Accruing |  |  | Nonaccrual |  |  | Total |  |  | for Loan Losses |
|  | (In thousands) |
Troubled debt restructurings: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  | $ | 357 |  |  | $ | 353 |  |  | $ | 710 |  |  | $ | 50 |  |  | $ | 180 |  |  | $ | 588 |  |  | $ | 768 |  |  | $ | 87 |
Land |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 109 |  |  |  | 109 |  |  |  | 0 |  |  |  | 0 |  |  |  | 170 |  |  |  | 170 |  |  |  | 0 |
Commercial real estate |  |  | 1,178 |  |  |  | 0 |  |  |  | 1,178 |  |  |  | 0 |  |  |  | 0 |  |  |  | 1,534 |  |  |  | 1,534 |  |  |  | 83 |
Commercial business |  |  | 0 |  |  |  | 1,776 |  |  |  | 1,776 |  |  |  | 1,065 |  |  |  | 0 |  |  |  | 1,776 |  |  |  | 1,776 |  |  |  | 1,098 |
Home equity and 2nd mortgage |  |  | 0 |  |  |  | 65 |  |  |  | 65 |  |  |  | 25 |  |  |  | 41 |  |  |  | 31 |  |  |  | 72 |  |  |  | 25 |
Consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total |  | $ | 1,535 |  |  | $ | 2,303 |  |  | $ | 3,838 |  |  | $ | 1,140 |  |  | $ | 221 |  |  | $ | 4,099 |  |  | $ | 4,320 |  |  | $ | 1,293 |
At June 30, 2013 and December 31, 2012, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR. The following table summarizes information in regard to TDRs that were restructured during the three months and six months ended June 30, 2013:
|  | Three months ended June 30, 2013 |  |  | Six months ended June 30, 2013 |
|  |  |  |  | Pre-Modification |  |  | Post-Modification |  |  |  |  |  | Pre-Modification |  |  | Post-Modification |
|  | Number of |  |  | Outstanding |  |  | Outstanding |  |  | Number of |  |  | Outstanding |  |  | Outstanding |
|  | Contracts |  |  | Balance |  |  | Balance |  |  | Contracts |  |  | Balance |  |  | Balance |
|  | (Dollars in thousands) |  |  | (Dollars in thousands) |
Troubled debt restructurings: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 1 |  |  | $ | 160 |  |  | $ | 160 |  |  |  | 1 |  |  | $ | 160 |  |  | $ | 160 |
Home equity & 2nd mortgage |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total |  |  | 1 |  |  | $ | 160 |  |  | $ | 160 |  |  |  | 1 |  |  | $ | 160 |  |  | $ | 160 |
For the TDR listed above, the term of modification included a reduction of the stated interest rate. There were no principal charge-offs recorded as a result of TDRs during the three months and six months ended June 30, 2013 and there was no specific allowance for loan losses related to TDRs modified during the three months and six months ended June 30, 2013. The following table summarizes information in regard to TDRs that were restructured during the six months ended June 30, 2012. There were no TDRs that were restructured during the three months ended June 30, 2012.
|  | Six months ended June 30, 2012 |
|  |  |  |  | Pre-Modification |  |  | Post-Modification |
|  | Number of |  |  | Outstanding |  |  | Outstanding |
|  | Contracts |  |  | Balance |  |  | Balance |
|  | (Dollars in thousands) |
Troubled debt restructurings: |  |  |  |  |  |  |  |  |  |  |  |
Residential real estate |  |  | 1 |  |  | $ | 88 |  |  | $ | 87 |
Home equity & 2nd mortgage |  |  | 1 |  |  |  | 25 |  |  |  | 25 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial real estate |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Commercial business |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Construction |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Consumer |  |  | 0 |  |  |  | 0 |  |  |  | 0 |
Total |  |  | 2 |  |  | $ | 113 |  |  | $ | 112 |
There were no TDRS modified within the previous 12 months for which there was a subsequent payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) during the six months ended June 30, 2013 and 2012. In the event that a TDR subsequently defaults, the Company evaluates the restructuring for possible impairment. As a result, the related allowance for loan losses may be increased or charge-offs may be taken to reduce the carrying amount of the loan.

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