Loans

12 Months Ended

Dec. 31, 2012

(3)

Loans

The components of loans are as follows (in thousands):

	At December 31,
	2012			2011

Residential real estate	$	30,064		$	31,142
Multi-family real estate		3,916			4,109
Commercial real estate		39,126			44,312
Land and construction		7,276			11,783
Commercial		7,158			0
Consumer		70			175
Total loans		87,610			91,521

Add (deduct):
Net deferred loan fees, costs and premiums		58			45
Allowance for loan losses		(2,459	)		(2,349	)

Loans, net	$	85,209		$	89,217

An analysis of the change in the allowance for loan losses for the years ended December 31, 2012 and 2011 follows (in thousands):

	Residential			Multi-Family			Commercial			Land
	Real			Real			Real			and
	Estate			Estate			Estate			Construction			Commercial		Consumer			Total
Year Ended December 31, 2012:
Beginning balance	$	566		$	247		$	1,334		$	187		$	0	$	15		$	2,349
(Credit) provision for loan losses		(1	)		19			912			531			216		(24	)		1,653
Charge-offs		(147	)		0			(903	)		(798	)		0		0			(1,848	)
Recoveries		16			1			29			246			0		13			305

Ending balance	$	434		$	267		$	1,372		$	166		$	216	$	4		$	2,459

Year Ended December 31, 2011:
Beginning balance	$	1,285		$	282		$	1,542		$	514		$	0	$	80		$	3,703
(Credit) provision for loan losses		(779	)		(42	)		(6	)		755			0		(77	)		(149	)
Charge-offs		(308	)		0			(202	)		(1,229	)		0		0			(1,739	)
Recoveries		368			7			0			147			0		12			534

Ending balance	$	566		$	247		$	1,334		$	187		$	0	$	15		$	2,349

The Company has divided the loan portfolio into six portfolio segments, each with different risk characteristics and methodologies for assessing risk. The portfolio segments identified by the Company are as follows:

Residential Real Estate, Multi-Family Real Estate, Commercial Real Estate, Land and Construction. Real estate mortgage loans are typically segmented into four categories: residential real estate, multi-family real estate, commercial real estate, and land and construction. Residential real estate loans are underwritten in accordance with policies set forth and approved by the Board of Directors (the "Board"), including repayment capacity and source, value of the underlying property, credit history and stability. Multi-family and commercial real estate loans are secured by the subject property and are underwritten based upon standards set forth in the policies approved by the Company's Board. Such standards include, among other factors, loan to value limits, cash flow coverage and general creditworthiness of the obligors. Construction loans to borrowers finance the construction of owner occupied and leased properties. These loans are categorized as construction loans during the construction period, later converting to commercial or residential real estate loans after the construction is complete and amortization of the loan begins. Real estate development and construction loans are approved based on an analysis of the borrower and guarantor, the viability of the project and on an acceptable percentage of the appraised value of the property securing the loan. Real estate development and construction loan funds are disbursed periodically based on the percentage of construction completed. The Company carefully monitors these loans with on-site inspections and requires the receipt of lien waivers on funds advanced. Development and construction loans are typically secured by the properties under development or construction, and personal guarantees are typically obtained. Further, to assure that reliance is not placed solely on the value of the underlying property, the Company considers the market conditions and feasibility of proposed projects, the financial condition and reputation of the borrower and guarantors, the amount of the borrower's equity in the project, independent appraisals, cost estimates and pre-construction sales information. The Company also makes loans on occasion for the purchase of land for future development by the borrower. Land loans are extended for future development for either commercial or residential use by the borrower. The Company carefully analyzes the intended use of the property and the viability thereof.

Commercial. Commercial business loans and lines of credit consist of loans to small- and medium-sized companies in the Company's market area. Commercial loans are generally used for working capital purposes or for acquiring equipment, inventory or furniture. Primarily all of the Company's commercial loans are secured loans, along with a small amount of unsecured loans. The Company's underwriting analysis consists of a review of the financial statements of the borrower, the lending history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business, the value of the collateral, if any, and whether the loan is guaranteed by the principals of the borrower. These loans are generally secured by accounts receivable, inventory and equipment. Commercial loans are typically made on the basis of the borrower's ability to make repayment from the cash flow of the borrower's business, which makes them of higher risk than residential loans and the collateral securing loans may be difficult to appraise and may fluctuate in value based on the success of the business. The Company seeks to minimize these risks through its underwriting standards.

Consumer Loans. Consumer loans are extended for various purposes, including purchases of automobiles, recreational vehicles, and boats. Also offered are home improvement loans, lines of credit, personal loans, and deposit account collateralized loans. Repayment of these loans is primarily dependent on the personal income of the borrowers, which can be impacted by economic conditions in their market areas such as unemployment levels. Loans to consumers are extended after a credit evaluation, including the creditworthiness of the borrower(s), the purpose of the credit, and the secondary source of repayment. Consumer loans are made at fixed and variable interest rates and may be made on terms of up to ten years. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

The balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on impairment method as of December 31, 2012 and 2011 follows (in thousands):

	Residential		Multi-Family		Commercial		Land
	Real		Real		Real		and
	Estate		Estate		Estate		Construction		Commercial		Consumer		Total
At December 31, 2012:
Individually evaluated for impairment:
Recorded investment	$	7,573	$	0	$	11,535	$	886	$	0	$	0	$	19,994
Balance in allowance for loan losses	$	0	$	0	$	366	$	0	$	0	$	0	$	366

Collectively evaluated for impairment:
Recorded investment	$	22,491	$	3,916	$	27,591	$	6,390	$	7,158	$	70	$	67,616
Balance in allowance for loan losses	$	434	$	267	$	1,006	$	166	$	216	$	4	$	2,093

	Residential		Multi-Family		Commercial		Land
	Real		Real		Real		and
	Estate		Estate		Estate		Construction		Commercial		Consumer		Total
At December 31, 2011:
Individually evaluated for impairment:
Recorded investment	$	7,919	$	0	$	16,716	$	7,241	$	0	$	68	$	31,944
Balance in allowance for loan losses	$	0	$	0	$	11	$	0	$	0	$	0	$	11

Collectively evaluated for impairment:
Recorded investment	$	23,223	$	4,109	$	27,596	$	4,542	$	0	$	107	$	59,577
Balance in allowance for loan losses	$	566	$	247	$	1,323	$	187	$	0	$	15	$	2,338

The following summarizes the loan credit quality (in thousands):

			OLEM
			(Other Loans
			Especially
	Pass		Mentioned)		Substandard		Doubtful		Loss		Total
At December 31, 2012:
Residential real estate	$	22,491	$	0	$	7,573	$	0	$	0	$	30,064
Multi-family real estate		3,916		0		0		0		0		3,916
Commercial real estate		24,967		2,624		11,535		0		0		39,126
Land and construction		4,402		1,987		887		0		0		7,276
Commercial		7,092		66		0		0		0		7,158
Consumer		70		0		0		0		0		70

Total	$	62,938	$	4,677	$	19,995	$	0	$	0	$	87,610

At December 31, 2011:
Residential real estate	$	22,455	$	3,686	$	5,001	$	0	$	0	$	31,142
Multi-family real estate		4,109		0		0		0		0		4,109
Commercial real estate		23,959		4,776		15,577		0		0		44,312
Land and construction		4,493		49		7,241		0		0		11,783
Consumer		107		68		0		0		0		175

Total	$	55,123	$	8,579	$	27,819	$	0	$	0	$	91,521

Internally assigned loan grades are defined as follows:

Pass – a Pass loan's primary source of loan repayment is satisfactory, with secondary sources very likely to be realized if necessary. These are loans that conform in all aspects to bank policy and regulatory requirements, and no repayment risk has been identified.

OLEM (Other Loans Especially Mentioned) – an Other Loan Especially Mentioned has potential weaknesses that deserve management's close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company's credit position at some future date.

Substandard – a Substandard loan 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 Company will sustain some loss if the deficiencies are not corrected.

Doubtful – a loan classified as Doubtful has all the weaknesses inherent in one classified as Substandard, with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. This classification does not mean that the asset 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 Company fully charges off any loan classified as Doubtful.

Loss – a loan classified as Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset 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 Company fully charges off any loan classified as Loss.

Age analysis of past-due loans is as follows is as follows (in thousands):

	Accruing Loans
					Greater
	30-59		60-89		Than 90		Total
	Days		Days		Days		Past				Nonaccrual		Total
	Past Due		Past Due		Past Due		Due		Current		Loans		Loans
At December 31, 2012:
Residential real estate	$	0	$	2,915	$	0	$	2,915	$	22,492	$	4,657	$	30,064
Multi-family real estate		0		0		0		0		3,916		0		3,916
Commercial real estate		0		0		0		0		27,591		11,535		39,126
Land and construction		0		0		0		0		6,389		887		7,276
Commercial		699		0		0		699		6,459		0		7,158
Consumer		0		0		0		0		70		0		70

Total	$	699	$	2,915	$	0	$	3,614	$	66,917	$	17,079	$	87,610

At December 31, 2011:
Residential real estate	$	0	$	768	$	0	$	768	$	25,373	$	5,001	$	31,142
Multi-family real estate		0		0		0		0		4,109		0		4,109
Commercial real estate		0		0		0		0		28,735		15,577		44,312
Land and construction		0		0		0		0		4,542		7,241		11,783
Consumer		0		0		0		0		175		0		175

Total	$	0	$	768	$	0	$	768	$	62,934	$	27,819	$	91,521

The following summarizes the amount of impaired loans (in thousands):

	At December 31, 2012						At December 31, 2011
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
	Investment		Balance		Allowance		Investment		Balance		Allowance
With no related allowance recorded:
Residential real estate	$	7,573	$	8,024	$	0	$	7,919	$	8,465	$	0
Commercial real estate		8,661		11,412		0		15,577		17,960		0
Land and construction		886		2,410		0		7,241		11,652		0
Consumer		0		0		0		68		68		0

With an allowance recorded-
Commercial real estate	$	2,874	$	2,874	$	366	$	1,139	$	1,139	$	11

Total:
Residential real estate	$	7,573	$	8,024	$	0	$	7,919	$	8,465	$	0
Commercial real estate	$	11,535	$	14,286	$	366	$	16,716	$	19,099	$	11
Land and construction	$	886	$	2,410	$	0	$	7,241	$	11,652	$	0
Consumer	$	0	$	0	$	0	$	68	$	68	$	0

Total	$	19,994	$	24,720	$	366	$	31,944	$	39,284	$	11

The average net investment in impaired loans and interest income recognized and received on impaired loans are as follows (in thousands):

	For the Year Ended December 31,
	2012						2011
	Average		Interest		Interest		Average		Interest		Interest
	Recorded		Income		Income		Recorded		Income		Income
	Investment		Recognized		Received		Investment		Recognized		Received

Residential real estate	$	7,795	$	175	$	307	$	11,077	$	226	$	306
Multi-family real estate	$	0	$	0	$	0	$	0	$	0	$	0
Commercial real estate	$	14,219	$	0	$	222	$	18,862	$	115	$	376
Land and construction	$	3,729	$	0	$	87	$	7,412	$	21	$	147
Consumer	$	0	$	0	$	0	$	198	$	5	$	5

Total	$	25,743	$	175	$	616	$	37,549	$	367	$	834

The following is a summary of loans determined to be troubled debt restructurings (dollars in thousands):

			Pre-		Post-
			Modification		Modification
	Number		Outstanding		Outstanding
	of		Recorded		Recorded
	Contracts		Investment		Investment
Troubled Debt Restructurings:
Year Ended December 31, 2012:
Residential real estate-
Modified interest rate and amortization		1	$	941	$	941

Year Ended December 31, 2011:
Residential real estate-
Modified interest rate and amortization		1	$	1,540	$	1,540
Commercial real estate-
Modified interest rate and amortization		4		5,915		5,915
Land and construction-
Modified interest rate and amortization		1		1,030		1,030

		6	$	8,485	$	8,485

The allowance for loan losses on residential real estate, commercial real estate, and land and construction loans that have been restructured and are considered trouble debt restructurings ("TDR") is included in the Company's specific reserve. The specific reserve is determined on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, or the fair value of the collateral if the loan is collateral-dependent. TDR's that have subsequently defaulted are considered collateral-dependent. There were no TDR's that have subsequently defaulted in the year they were restructured which were restructured during 2012 and 2011.