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 $2.2 million as of September 30, 2017 and $2.0 million as of December 31, 2016.


	September 30, 2017					December 31, 2016
(dollars in thousands)	Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	317,262		23.9	%	$	285,938		24.6	%
Non-owner occupied RE		301,360		22.7	%		239,574		20.6	%
Construction		32,332		2.4	%		33,393		2.9	%
Business		214,898		16.2	%		202,552		17.4	%
Total commercial loans		865,852		65.2	%		761,457		65.5	%
Consumer
Real estate		250,483		18.9	%		215,588		18.5	%
Home equity		150,371		11.3	%		137,105		11.8	%
Construction		38,766		2.9	%		31,922		2.7	%
Other		22,267		1.7	%		17,572		1.5	%
Total consumer loans		461,887		34.8	%		402,187		34.5	%
Total gross loans, net of deferred fees		1,327,739		100.0	%		1,163,644		100.0	%
Less—allowance for loan losses		(15,579	)				(14,855	)
Total loans, net	$	1,312,160				$	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.


				September 30, 2017
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	24,771	165,019	127,472		317,262
Non-owner occupied RE		47,778	155,987	97,595		301,360
Construction		6,908	6,492	18,932		32,332
Business		63,391	109,003	42,504		214,898
Total commercial loans		142,848	436,501	286,503		865,852
Consumer
Real estate		23,864	62,991	163,628		250,483
Home equity		10,441	25,930	114,000		150,371
Construction		19,312	635	18,819		38,766
Other		5,875	12,082	4,310		22,267
Total consumer loans		59,492	101,638	300,757		461,887
Total gross loans, net of deferred fees	$	202,340	538,139	587,260		1,327,739
Loans maturing after one year with:
Fixed interest rates					$	851,998
Floating interest rates						273,401

				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 our 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.


					September 30, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	312,878	294,934	32,332	204,694	844,838
Special mention		2,020	2,039	-	4,587	8,646
Substandard		2,364	4,387	-	5,617	12,368
Doubtful		-	-	-	-	-
	$	317,262	301,360	32,332	214,898	865,852


					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.


					September 30, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	317,019	300,720	32,332	213,394	863,465
30-59 days past due		-	-	-	1,381	1,381
60-89 days past due		-	-	-	-	-
Greater than 90 Days		243	640	-	123	1,006
	$	317,262	301,360	32,332	214,898	865,852

					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 September 30, 2017 and December 31, 2016, loans 30 days or more past due represented 0.36% and 0.55% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.18% and 0.38% of the Company’s total loan portfolio as of September 30, 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.


					September 30, 2017
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	246,962	147,570	38,766	22,172	455,470
Special mention		719	126	-	7	852
Substandard		2,802	2,675	-	88	5,565
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	250,483	150,371	38,766	22,267	461,887


					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.


					September 30, 2017
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	248,907	149,978	38,493	22,175	459,553
30-59 days past due		132	90	-	92	314
60-89 days past due		1,172	180	273	-	1,625
Greater than 90 Days		272	123	-	-	395
	$	250,483	150,371	38,766	22,267	461,887

					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 September 30, 2017 and December 31, 2016, consumer loans 30 days or more past due were 0.18% 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)	September 30, 2017		December 31, 2016
Commercial
Owner occupied RE	$	244	276
Non-owner occupied RE		2,049	2,711
Construction		-	-
Business		1,116	686
Consumer
Real estate		1,267	550
Home equity		195	256
Construction		-	-
Other		2	13
Nonaccruing troubled debt restructurings		730	990
Total nonaccrual loans, including nonaccruing TDRs		5,603	5,482
Other real estate owned		420	639
Total nonperforming assets	$	6,023	6,121
Nonperforming assets as a percentage of:
Total assets		0.39%	0.46%
Gross loans		0.45%	0.53%
Total loans over 90 days past due		1,401	1,984
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	6,954	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.


				September 30, 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	$	2,232	2,177	830	192
Non-owner occupied RE		7,854	4,299	3,704	948
Construction		-	-	-	-
Business		4,488	3,355	2,090	1,140
Total commercial		14,574	9,831	6,624	2,280
Consumer
Real estate		2,382	2,357	2,357	1,304
Home equity		203	195	195	133
Construction		-	-	-	-
Other		175	174	174	25
Total consumer		2,760	2,726	2,726	1,462
Total	$	17,334	12,557	9,350	3,742


				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
	September 30, 2017			September 30, 2016
	Average		Recognized	Average	Recognized
	recorded		interest	recorded	interest
(dollars in thousands)	investment		income	investment	income
Commercial
Owner occupied RE	$	2,182	25	2,000	30
Non-owner occupied RE		4,322	57	5,515	39
Construction		-	-	-	-
Business		3,498	58	5,072	71
Total commercial		10,002	140	12,587	140
Consumer
Real estate		2,361	40	1,573	16
Home equity		196	2	207	-
Construction		-	-	-	-
Other		176	1	257	2
Total consumer		2,733	43	2,037	18
Total	$	12,735	183	14,624	158


	Nine months ended			Nine months ended			Year ended
	September 30, 2017			September 30, 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	$	2,198	78	2,009	72	2,263	112
Non-owner occupied RE		4,503	154	5,594	124	4,106	200
Construction		-	-	-	-	-	-
Business		3,585	165	5,134	199	2,873	135
Total commercial		10,286	397	12,737	395	9,242	447
Consumer
Real estate		2,370	73	1,578	49	1,854	81
Home equity		196	4	257	1	257	2
Construction		-	-	-	-	-	-
Other		178	4	208	5	203	6
Total consumer		2,744	81	2,043	55	2,314	89
Total	$	13,030	478	14,780	450	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 September 30, 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	$	2,964		2,981	350		3,857		3,061	1,608		328		295		15,444
Provision for loan losses		(141	)	634	(122	)	213		160	(196	)	(47	)	(1	)	500
Loan charge-offs		-		-	-		(388	)	-	-		-		(11	)	(399	)
Loan recoveries		-		1	-		31		1	-		-		1		34
Net loan charge-offs		-		1	-		(357	)	1	-		-		(10	)	(365	)
Balance, end of period	$	2,823		3,616	228		3,713		3,222	1,412		281		284		15,579
Net charge-offs to average loans (annualized)																0.11%
Allowance for loan losses to gross loans																1.17%
Allowance for loan losses to nonperforming loans																278.05%


												Three months ended September 30, 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	$	2,797		3,011		350		4,019		2,302		1,296		212		330		14,317
Provision for loan losses		98		47		(53	)	337		215		119		(5	)	67		825
Loan charge-offs		-		(25	)	-		(515	)	-		(43	)	-		(100	)	(683	)
Loan recoveries		-		5		-		13		-		-		-		1		19
Net loan charge-offs		-		(20	)	-		(502	)	-		(43	)	-		(99	)	(664	)
Balance, end of period	$	2,895		3,038		297		3,854		2,517		1,372		207		298		14,478
Net charge-offs to average loans (annualized)																		0.24%
Allowance for loan losses to gross loans																		1.30%
Allowance for loan losses to nonperforming loans																		258.3%



												Nine months ended September 30, 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		(20	)	1,257		(67	)	31		359		(75	)	29		(14	)	1,500
Loan charge-offs		-		(433	)	-		(518	)	-		-		-		(11	)	(962	)
Loan recoveries		-		14		-		77		83		12		-		-		186
Net loan charge-offs		-		(419	)	-		(441	)	83		12		-		(11	)	(776	)
Balance, end of period	$	2,823		3,616		228		3,713		3,222		1,412		281		284		15,579
Net charge-offs to average loans (annualized)																		0.08%

												Nine months ended September 30, 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		553		(81	)	2		666		641		236		(106	)	114		2,025
Loan charge-offs		(5	)	(100	)	(43	)	(862	)	(194	)	(66	)	-		(192	)	(1,462	)
Loan recoveries		-		32		-		250		-		-		-		4		286
Net loan charge-offs		(5	)	(68	)	(43	)	(612	)	(194	)	(66	)	-		(188	)	(1,176	)
Balance, end of period	$	2,895		3,038		297		3,854		2,517		1,372		207		298		14,478
Net charge-offs to average loans (annualized)																		0.15%

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


						September 30, 2017
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	2,280	1,462	3,742	9,831	2,726	12,557
Collectively evaluated		8,100	3,737	11,837	856,021	459,161	1,315,182
Total	$	10,380	5,199	15,579	865,852	461,887	1,327,739

						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