NOTE 4 – Loans and Allowance for Loan Losses

The following table summarizes the composition of our loan portfolio. Total gross loans are recorded net of deferred loan fees and costs, which totaled $2.1 million as of March 31, 2017 and $2.0 million as of December 31, 2016.


	March 31, 2017							December 31, 2016
(dollars in thousands)			Amount		% of Total			Amount		% of Total
Commercial
Owner occupied RE		$	288,300		23.7	%	$	285,938		24.6	%
Non-owner occupied RE			258,449		21.2	%		239,574		20.6	%
Construction			36,889		3.0	%		33,393		2.9	%
Business			208,590		17.1	%		202,552		17.4	%
Total commercial loans			792,228		65.0	%		761,457		65.5	%
Consumer
Real estate			230,695		18.9	%		215,588		18.5	%
Home equity			143,673		11.8	%		137,105		11.8	%
Construction			31,535		2.6	%		31,922		2.7	%
Other			20,549		1.7	%		17,572		1.5	%
Total consumer loans			426,452		35.0	%		402,187		34.5	%
Total gross loans, net of deferred fees			1,218,680		100.0	%		1,163,644		100.0	%
Less—allowance for loan losses			(15,287	)				(14,855	)
Total loans, net		$	1,203,393				$	1,148,789

Maturities and Sensitivity of Loans to Changes in Interest Rates

The information in the following tables summarizes the loan maturity distribution by type and related interest rate characteristics based on the contractual maturities of individual loans, including loans which may be subject to renewal at their contractual maturity. Renewal of such loans is subject to review and credit approval, as well as modification of terms upon maturity. Actual repayments of loans may differ from the maturities reflected below, because borrowers have the right to prepay obligations with or without prepayment penalties.


	March 31, 2017
				After one
			One year	but within	After five
(dollars in thousands)			or less	five years	years		Total
Commercial
Owner occupied RE		$	22,336	149,371	116,593		288,300
Non-owner occupied RE			33,669	140,116	84,664		258,449
Construction			9,077	11,358	16,454		36,889
Business			62,790	106,729	39,071		208,590
Total commercial loans			127,872	407,574	256,782		792,228
Consumer
Real estate			28,754	52,367	149,574		230,695
Home equity			7,391	29,494	106,788		143,673
Construction			15,762	606	15,167		31,535
Other			6,600	9,629	4,320		20,549
Total consumer loans			58,507	92,096	275,849		426,452
Total gross loans, net of deferred fees		$	186,379	499,670	532,631		1,218,680
Loans maturing after one year with:
Fixed interest rates						$	778,861
Floating interest rates							253,440

	December 31, 2016
				After one
			One year	but within	After five
			or less	five years	years		Total
Commercial
Owner occupied RE		$	26,062	145,419	114,457		285,938
Non-owner occupied RE			34,685	142,261	62,628		239,574
Construction			5,881	9,558	17,954		33,393
Business			66,361	99,255	36,936		202,552
Total commercial loans			132,989	396,493	231,975		761,457
Consumer
Real estate			26,342	49,832	139,414		215,588
Home equity			7,142	29,041	100,922		137,105
Construction			14,103	627	17,192		31,922
Other			5,049	9,305	3,218		17,572
Total consumer			52,636	88,805	260,746		402,187
Total gross loan, net of deferred fees		$	185,625	485,298	492,721		1,163,644
Loans maturing after one year with:
Fixed interest rates						$	733,892
Floating interest rates							244,127

Portfolio Segment Methodology

Commercial
Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. The Company applies historic grade-specific loss factors to each loan class. In the development of statistically derived loan grade loss factors, the Company observes historical losses over 20 quarters for each loan grade. These loss estimates are adjusted as appropriate based on additional analysis of external loss data or other risks identified from current economic conditions and credit quality trends. The allowance also includes an amount for the estimated impairment on nonaccrual commercial loans and commercial loans modified in a troubled debt restructuring (“TDR”), whether on accrual or nonaccrual status.

Consumer
For consumer loans, the Company determines the allowance on a collective basis utilizing historical losses over 20 quarters to represent its best estimate of inherent loss. The Company pools loans, generally by loan class with similar risk characteristics. The allowance also includes an amount for the estimated impairment on nonaccrual consumer loans and consumer loans modified in a TDR, whether on accrual or nonaccrual status.

Credit Quality Indicators

Commercial
We manage a consistent process for assessing commercial loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by banking regulatory agencies. Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for credit losses.

We categorize our loans into risk categories based on relevant information about the ability of the borrower to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. A description of the general characteristics of the risk grades is as follows:

●	Pass—These loans range from minimal credit risk to average however still acceptable credit risk.

●	Special mention—A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or the institution’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 may jeopardize the liquidation of the debt. A substandard loan is characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected.

●	Doubtful—A doubtful loan has all of the weaknesses inherent in one classified as substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of the currently existing facts, conditions and values, highly questionable and improbable.

The tables below provide a breakdown of outstanding commercial loans by risk category.


	March 31, 2017
		Owner		Non-owner
(dollars in thousands)		occupied RE		occupied RE	Construction	Business	Total
Pass		$	282,726	253,421	36,889	198,953	771,989
Special mention			3,164	976	-	3,735	7,875
Substandard			2,410	4,052	-	5,902	12,364
Doubtful			-	-	-	-	-
		$	288,300	258,449	36,889	208,590	792,228


	December 31, 2016
			Owner	Non-owner
			occupied RE	occupied RE	Construction	Business	Total
Pass		$	282,055	234,957	33,393	193,517	743,922
Special mention			1,097	975	-	2,489	4,561
Substandard			2,786	3,642	-	6,546	12,974
Doubtful			-	-	-	-	-
		$	285,938	239,574	33,393	202,552	761,457

The following tables provide past due information for outstanding commercial loans and include loans on nonaccrual status as well as accruing TDRs.


						March 31, 2017
			Owner	Non-owner
(dollars in thousands)			occupied RE	occupied RE	Construction	Business	Total
Current		$	288,035	256,991	36,889	206,466	788,381
30-59 days past due			-	416	-	651	1,067
60-89 days past due			249	-	-	1,100	1,349
Greater than 90 Days			16	1,042	-	373	1,431
		$	288,300	258,449	36,889	208,590	792,228

	December 31, 2016
			Owner	Non-owner
			occupied RE	occupied RE	Construction	Business	Total
Current		$	284,700	238,346	33,393	200,624	757,063
30-59 days past due			981	-	-	1,423	2,404
60-89 days past due			257	56	-	-	313
Greater than 90 Days			-	1,172	-	505	1,677
		$	285,938	239,574	33,393	202,552	761,457

As of March 31, 2017 and December 31, 2016, loans 30 days or more past due represented 0.45% and 0.55% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.32% and 0.38% of the Company’s total loan portfolio as of March 31, 2017 and December 31, 2016, respectively.

Consumer
The Company manages a consistent process for assessing consumer loan credit quality by monitoring its loan grading trends and past due statistics. All loans are subject to individual risk assessment. The Company’s categories include Pass, Special Mention, Substandard, and Doubtful, which are defined above. Delinquency statistics are also an important indicator of credit quality in the establishment of the allowance for loan losses.

The tables below provide a breakdown of outstanding consumer loans by risk category.


	March 31, 2017
(dollars in thousands)			Real estate	Home equity	Construction	Other	Total
Pass		$	226,785	140,439	31,535	20,428	419,187
Special mention			860	2,184	-	24	3,068
Substandard			3,050	1,050	-	97	4,197
Doubtful			-	-	-	-	-
Loss			-	-	-	-	-
		$	230,695	143,673	31,535	20,549	426,452


	December 31, 2016
		Real estate		Home equity	Construction	Other	Total
Pass		$	211,563	134,124	31,922	17,485	395,094
Special mention			1,064	2,109	-	16	3,189
Substandard			2,961	872	-	71	3,904
Doubtful			-	-	-	-	-
Loss			-	-	-	-	-
		$	215,588	137,105	31,922	17,572	402,187

The following tables provide past due information for outstanding consumer loans and include loans on nonaccrual status as well as accruing TDRs.


	March 31, 2017
(dollars in thousands)		Real estate		Home equity	Construction	Other	Total
Current		$	229,729	143,078	31,535	20,510	424,852
30-59 days past due			413	209	-	39	661
60-89 days past due			553	129	-	-	682
Greater than 90 Days			-	257	-	-	257
		$	230,695	143,673	31,535	20,549	426,452

	December 31, 2016
			Real estate	Home equity	Construction	Other	Total
Current		$	214,228	136,638	31,922	17,427	400,215
30-59 days past due			1,041	210	-	126	1,377
60-89 days past due			282	-	-	6	288
Greater than 90 Days			37	257	-	13	307
		$	215,588	137,105	31,922	17,572	402,187

As of March 31, 2017 and December 31, 2016, consumer loans 30 days or more past due were 0.13% and 0.17% of total loans, respectively.

Nonperforming assets

The following table shows the nonperforming assets and the related percentage of nonperforming assets to total assets and gross loans. Generally, a loan is placed on nonaccrual status when it becomes 90 days past due as to principal or interest, or when the Company believes, after considering economic and business conditions and collection efforts, that the borrower’s financial condition is such that collection of the contractual principal or interest on the loan is doubtful. A payment of interest on a loan that is classified as nonaccrual is recognized as a reduction in principal when received.

Following is a summary of our nonperforming assets, including nonaccruing TDRs.


(dollars in thousands)	March 31, 2017			December 31, 2016
Commercial
Owner occupied RE	$	266		276
Non-owner occupied RE		2,514		2,711
Construction		-		-
Business		1,616		686
Consumer
Real estate		541		550
Home equity		257		256
Construction		-		-
Other		5		13
Nonaccruing troubled debt restructurings		979		990
Total nonaccrual loans, including nonaccruing TDRs		6,178		5,482
Other real estate owned		669		639
Total nonperforming assets	$	6,847		6,121
Nonperforming assets as a percentage of:
Total assets		0.47	%	0.46	%
Gross loans		0.56	%	0.53	%
Total loans over 90 days past due		1,688		1,984
Loans over 90 days past due and still accruing		-		-
Accruing troubled debt restructurings	$	5,795		5,675

Impaired Loans

The table below summarizes key information for impaired loans. The Company’s impaired loans include loans on nonaccrual status and loans modified in a TDR, whether on accrual or nonaccrual status. These impaired loans may have estimated impairment which is included in the allowance for loan losses. The Company’s commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.


			March 31, 2017
				Recorded investment
					Impaired loans
	Unpaid				with related	Related
	Principal			Impaired	allowance for	allowance for
(dollars in thousands)	Balance			loans	loan losses	loan losses
Commercial
Owner occupied RE	$	2,271		2,220	2,220	420
Non-owner occupied RE		7,226		3,823	1,503	410
Construction		-		-	-	-
Business		4,353		3,665	2,943	1,160
Total commercial		13,850		9,708	6,666	1,990
Consumer
Real estate		1,844		1,828	1,642	605
Home equity		262		257	123	61
Construction		-		-	-	-
Other		181		181	181	93
Total consumer		2,287		2,266	1,946	759
Total	$	16,137		11,974	8,612	2,749


			December 31, 2016
			Recorded investment
					Impaired loans
	Unpaid				with related	Related
	Principal			Impaired	allowance for	allowance for
	Balance			loans	loan losses	loan losses
Commercial
Owner occupied RE	$	2,284		2,243	2,224	263
Non-owner occupied RE		7,238		4,031	1,638	457
Construction		-		-	-	-
Business		3,699		2,593	1,610	1,154
Total commercial		13,221		8,867	5,472	1,874
Consumer
Real estate		1,853		1,843	1,843	682
Home equity		207		257	-	-
Construction		-		-	-	-
Other		261		190	177	88
Total consumer		2,321		2,290	2,020	770
Total	$	15,542		11,157	7,492	2,644

The following table provides the average recorded investment in impaired loans and the amount of interest income recognized on impaired loans after impairment by portfolio segment and class.


	Three months ended					Three months ended			Year ended
	March 31, 2017				March 31, 2016			December 31, 2016
		Average		Recognized		Average	Recognized	Average	Recognized
		recorded		interest		recorded	interest	recorded	interest
(dollars in thousands)		investment		income		investment	income	investment	income
Commercial
Owner occupied RE		$	2,232	28	$	615	7	2,263	112
Non-owner occupied RE			3,927	29		5,731	48	4,106	200
Construction			-	-		1,778	30	-	-
Business			3,675	40		2,760	30	2,873	135
Total commercial			9,834	97		10,884	115	9,242	447
Consumer
Real estate			1,836	16		1,119	9	1,854	81
Home equity			256	1		195	2	257	2
Construction			-	-		-	-	-	-
Other			182	-		257	-	203	6
Total consumer			2,274	17		1,571	11	2,314	89
Total		$	12,108	114	$	12,455	126	11,556	536

Allowance for Loan Losses

The allowance for loan loss is management’s estimate of credit losses inherent in the loan portfolio. The allowance for loan losses is established as losses are estimated to have occurred through a 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 allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability 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 Company has an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in the portfolio. While the Company attributes portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. The Company’s process involves procedures to appropriately consider the unique risk characteristics of the commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. The Company’s allowance levels are influenced by loan volume, loan grade or delinquency status, historic loss experience and other economic conditions.

The following table summarizes the activity related to the allowance for loan losses by commercial and consumer portfolio segments:


	Three months ended March 31, 2017
	Commercial								Consumer
	Owner			Non-owner
	occupied			occupied					Real		Home
(dollars in thousands)	RE			RE		Construction	Business		Estate		equity	Construction	Other		Total
Balance, beginning of period	$	2,843		2,778		295	4,123		2,780		1,475	252	309		14,855
Provision for loan losses		209		369		39	(321	)	(40	)	143	37	64		500
Loan charge-offs		-		(181	)	-	(9	)	-		-	-	-		(190	)
Loan recoveries		-		1		-	30		90		1	-	-		122
Net loan charge-offs		-		(180	)	-	21		90		1	-	-		(68	)
Balance, end of period	$	3,052		2,967		334	3,823		2,830		1,619	289	373		15,287
Net charge-offs to average loans (annualized)															0.02%
Allowance for loan losses to gross loans															1.25%
Allowance for loan losses to nonperforming loans															247.43%

	Three months ended March 31, 2016
	Commercial								Consumer
	Owner			Non-owner
	occupied			occupied					Real		Home
(dollars in thousands)	RE			RE		Construction	Business		Estate		equity	Construction	Other		Total
Balance, beginning of period	$	2,347		3,187		338	3,800		2,070		1,202	313	372		13,629
Provision for loan losses		151		122		104	(158	)	248		61	38	59		625
Loan charge-offs		(5	)	(75	)	-	(36	)	(187	)	-	-	(91	)	(394	)
Loan recoveries		-		2		-	33		-		-	-	3		38
Net loan charge-offs		(5	)	(73	)	-	(3	)	(187	)	-	-	(88	)	(356	)
Balance, end of period	$	2,493		3,236		442	3,639		2,131		1,263	351	343		13,898
Net charge-offs to average loans (annualized)															0.14%
Allowance for loan losses to gross loans															1.34%
Allowance for loan losses to nonperforming loans															224.56%

The following table disaggregates the allowance for loan losses and recorded investment in loans by impairment methodology.


	March 31, 2017
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,990	759	2,749	9,708	2,266	11,974
Collectively evaluated		8,230	4,308	12,538	782,520	424,186	1,206,706
Total	$	10,220	5,067	15,287	792,228	426,452	1,218,680

	December 31, 2016
	Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,874	770	2,644	8,867	2,290	11,157
Collectively evaluated		8,165	4,046	12,211	752,590	399,897	1,152,487
Total	$	10,039	4,816	14,855	761,457	402,187	1,163,644