5. Loans, net and allowance for loan losses:

The major classifications of loans outstanding, net of deferred loan origination fees and costs at June 30, 2015 and December 31, 2014 are summarized as follows. Net deferred loan costs were $700 and $651 at June 30, 2015 and December 31, 2014.


	June 30, 2015		December 31, 2014
Commercial	$	322,418	$	319,590
Real estate:
Commercial		511,835		493,481
Residential		312,567		310,667
Consumer		84,721		86,156

Total	$	1,231,541	$	1,209,894

The changes in the allowance for loan losses account by major classification of loan for the three and six months ended June 30, 2015 and 2014 are summarized as follows:


				Real estate
June 30, 2015	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance April 1, 2015	$	2,420		$	3,087		$	3,909		$	1,387		$	10,803
Charge-offs		(3	)		(30	)		(35	)		(106	)		(174	)
Recoveries		3			5			3			38			49
Provisions		15			128			150			457			750

Ending balance	$	2,435		$	3,190		$	4,027		$	1,776		$	11,428


				Real estate
June 30, 2015	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance January 1, 2015	$	2,321		$	3,037		$	3,690		$	1,290		$	10,338
Charge-offs		(40	)		(79	)		(234	)		(186	)		(539	)
Recoveries		64			6			8			51			129
Provisions		90			226			563			621			1,500

Ending balance	$	2,435		$	3,190		$	4,027		$	1,776		$	11,428


				Real estate
June 30, 2014	Commercial			Commercial			Residential			Consumer			Total
Allowance for loan losses:
Beginning Balance April 1, 2014	$	1,961		$	2,473		$	3,248		$	1,177		$	8,859
Charge-offs		(29	)		(404	)		(270	)		(87	)		(790	)
Recoveries		1			269			35			47			352
Provisions		268			337			445			151			1,201

Ending balance	$	2,201		$	2,675		$	3,458		$	1,288		$	9,622


				Real estate
June 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	)		(432	)		(510	)		(155	)		(1,473	)
Recoveries		1			269			38			78			386
Provisions		568			444			795			251			2,058

Ending balance	$	2,201		$	2,675		$	3,458		$	1,288		$	9,622

The allocation of the allowance for loan losses and the related loans by major classifications of loans at June 30, 2015 and December 31, 2014 is summarized as follows:


			Real estate
June 30, 2015	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	2,435	$	3,190	$	4,027	$	1,776	$	$	11,428

Ending balance: individually evaluated for impairment		1,209		1,338		796		137			3,480

Ending balance: collectively evaluated for impairment		1,226		1,745		3,231		1,639			7,841

Ending balance: loans acquired with deteriorated credit quality	$		$	107	$		$			$	107

Loans receivable:
Ending balance	$	322,418	$	511,835	$	312,567	$	84,721	$	$	1,231,541

Ending balance: individually evaluated for impairment		1,948		6,080		4,385		137			12,550

Ending balance: collectively evaluated for impairment		319,448		504,379		308,127	$	84,584			1,216,538

Ending balance: loans acquired with deteriorated credit quality	$	1,022	$	1,376	$	55			$	$	2,453


			Real estate
December 31, 2014	Commercial		Commercial		Residential		Consumer		Unallocated	Total
Allowance for loan losses:
Ending balance	$	2,321	$	3,037	$	3,690	$	1,290	$	$	10,338

Ending balance: individually evaluated for impairment		1,072		805		767		38			2,682

Ending balance: collectively evaluated for impairment		1,081		2,125		2,921		1,252			7,379

Ending balance: loans acquired with deteriorated credit quality	$	168	$	107	$	2				$	277

Loans receivable:
Ending balance	$	319,590	$	493,481	$	310,667	$	86,156	$	$	1,209,894

Ending balance: individually evaluated for impairment		2,595		5,084		4,001		127			11,807

Ending balance: collectively evaluated for impairment		315,642		487,024		306,608	$	86,029			1,195,303

Ending balance: loans acquired with deteriorated credit quality	$	1,353	$	1,373	$	58			$	$	2,784

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 June 30, 2015 and December 31, 2014:


June 30, 2015	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	309,696	$	6,171	$	6,551	$	$	322,418
Real estate:
Commercial		486,289		13,280		12,266			511,835
Residential		301,962		1,865		8,740			312,567
Consumer		84,583				138			84,721

Total	$	1,182,530	$	21,316	$	27,695	$	$	1,231,541


December 31, 2014:	Pass		Special Mention		Substandard		Doubtful	Total
Commercial	$	306,066	$	6,135	$	7,389	$	$	319,590
Real estate:
Commercial		472,270		9,858		11,353			493,481
Residential		300,299		2,123		8,245			310,667
Consumer		86,037		13		106			86,156

Total	$	1,164,672	$	18,129	$	27,093	$	$	1,209,894

Information concerning nonaccrual loans by major loan classification at June 30, 2015 and December 31, 2014 is summarized as follows:


	June 30, 2015		December 31, 2014
Commercial	$	1,499	$	1,322
Real estate:
Commercial		3,468		3,732
Residential		3,881		3,523
Consumer		135		122

Total	$	8,983	$	8,699

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


June 30, 2015	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	$	426	$	61	$	1,499	$	1,986	$	320,432	$	322,418
Real estate:
Commercial		3,000		205		3,468		6,673		505,162		511,835
Residential		1,098		1,708		4,611		7,417		305,150		312,567	$	730
Consumer		654		232		477		1,363		83,358		84,721		342

Total	$	5,178	$	2,206	$	10,055	$	17,439	$	1,214,102	$	1,231,541	$	1,072


December 31, 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	$	898	$	117	$	1,322	$	2,337	$	317,253	$	319,590
Real estate:
Commercial		2,100		888		3,868		6,856		486,625		493,481	$	136
Residential		3,154		1,239		4,585		8,978		301,689		310,667		1,062
Consumer		848		247		547		1,642		84,514		86,156		425

Total	$	7,000	$	2,491	$	10,322	$	19,813	$	1,190,081	$	1,209,894	$	1,623

The following tables summarize information concerning impaired loans as of and for the three and six months ended June 30, 2015 and June 30, 2014, and as of and for the year ended, December 31, 2014 by major loan classification:


							This Quarter				Year-to-Date
June 30, 2015	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	1,658	$	3,184			$	1,989	$	17	$	2,168	$	37
Real estate:
Commercial		2,140		2,852				2,169		28		2,366		47
Residential		2,734		2,917				2,503		1		2,488		2
Consumer								6				26

Total		6,532		8,953				6,667		46		7,048		86

With an allowance recorded:
Commercial		1,312		1,312	$	1,209		1,469		13		1,533		27
Real estate:
Commercial		5,316		5,316		1,445		4,628		48		4,182		65
Residential		1,706		1,706		796		1,673		7		1,593		17
Consumer		137		137		137		114				91

Total		8,471		8,471		3,587		7,884		68		7,399		109

Commercial		2,970		4,496		1,209		3,458		30		3,701		64
Real estate:
Commercial		7,456		8,168		1,445		6,797		76		6,548		112
Residential		4,440		4,623		796		4,176		8		4,081		19
Consumer		137		137		137		120				117

Total	$	15,003	$	17,424	$	3,587	$	14,551	$	114	$	14,447	$	195


							For the Year Ended
December 31, 2014	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial	$	2,379	$	4,084			$	2,669		141
Real estate:
Commercial		2,932		3,690				7,944		120
Residential		2,672		2,857				2,731		4
Consumer		83		83				94

Total		8,066		10,714				13,438		265

With an allowance recorded:
Commercial		1,569		1,569	$	1,240		1,787	$	58
Real estate:
Commercial		3,525		3,525		912		2,293		28
Residential		1,387		1,387		769		590		10
Consumer		44		44		38		10		1

Total		6,525		6,525		2,959		4,680		97

Commercial		3,948		5,653		1,240		4,456		199
Real estate:
Commercial		6,457		7,215		912		10,237		148
Residential		4,059		4,244		769		3,321		14
Consumer		127		127		38		104		1

Total	$	14,591	$	17,239	$	2,959	$	18,118	$	362


							This Quarter				Year-to-Date
June 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	$	2,649	$	4,470			$	2,329	$	28	$	2,908	$	52
Real estate:
Commercial		9,899		12,619				9,929		19		10,077		38
Residential		2,720		2,908				2,730		1		2,801		2
Consumer		97		97				113				111

Total		15,365		20,094				15,101		48		15,897		92

With an allowance recorded:
Commercial		1,757		1,757	$	1,157		1,743		23		1,853		43
Real estate:
Commercial		1,387		1,387		527		1,395		14		1,397		29
Residential		257		257		162		259				390
Consumer

Total		3,401		3,401		1,846		3,397		37		3,640		72

Commercial		4,406		6,227		1,157		4,072		51		4,761		95
Real estate:
Commercial		11,286		14,006		527		11,324		33		11,474		67
Residential		2,977		3,165		162		2,989		1		3,191		2
Consumer		97		97				113				111

Total	$	18,766	$	23,495	$	1,846	$	18,498	$	85	$	19,537	$	164

Included in the commercial loan and commercial and residential real estate categories are troubled debt restructurings that are classified as impaired. Troubled debt restructurings totaled $3,046 at June 30, 2015, $2,933 at December 31, 2014 and $1,900 at June 30, 2014.

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 were four loans modified as a troubled debt restructuring for the three months ended June 30, 2015, in the amount of $170. There were eight loans modified as troubled debt restructurings for the first six months ended June 30, 2015, in the amount of $554. There were no loans modified as troubled debt restructurings for the three or six months ended June 30, 2014. During the three and six months ended June 30, 2015 and 2014, there were no defaults on loans restructured within the last twelve months.