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 $2.8 million as of September 30, 2018 and $2.3 million as of December 31, 2017.


	September 30, 2018					December 31, 2017
(dollars in thousands)		Amount		% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	372,120		23.0	%	$	316,818		22.8	%
Non-owner occupied RE		399,166		24.6	%		312,798		22.6	%
Construction		68,415		4.2	%		51,179		3.7	%
Business		244,348		15.1	%		226,158		16.3	%
Total commercial loans		1,084,049		66.9	%		906,953		65.4	%
Consumer
Real estate		311,271		19.2	%		273,050		19.7	%
Home equity		163,654		10.1	%		156,141		11.3	%
Construction		38,015		2.4	%		28,351		2.0	%
Other		23,212		1.4	%		22,575		1.6	%
Total consumer loans		536,152		33.1	%		480,117		34.6	%
Total gross loans, net of deferred fees		1,620,201		100.0	%		1,387,070		100.0	%
Less—allowance for loan losses		(16,140	)				(15,523	)
Total loans, net	$	1,604,061				$	1,371,547

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, 2018
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	25,962	164,564	181,594		372,120
Non-owner occupied RE		35,003	213,384	150,779		399,166
Construction		19,455	26,137	22,823		68,415
Business		74,091	124,489	45,768		244,348
Total commercial loans		154,511	528,574	400,964		1,084,049
Consumer
Real estate		37,128	67,254	206,889		311,271
Home equity		11,097	25,556	127,001		163,654
Construction		20,006	887	17,122		38,015
Other		7,961	10,714	4,537		23,212
Total consumer loans		76,192	104,411	355,549		536,152
Total gross loans, net of deferred fees	$	230,703	632,985	756,513		1,620,201
Loans maturing after one year with:
Fixed interest rates					$	1,056,262
Floating interest rates						333,236


	December 31, 2017
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	24,171	167,425	125,222		316,818
Non-owner occupied RE		39,519	165,764	107,515		312,798
Construction		13,086	12,796	25,297		51,179
Business		73,588	107,584	44,986		226,158
Total commercial loans		150,364	453,569	303,020		906,953
Consumer
Real estate		30,172	61,809	181,069		273,050
Home equity		13,331	25,807	117,003		156,141
Construction		14,943	1,737	11,671		28,351
Other		7,203	11,371	4,001		22,575
Total consumer		65,649	100,724	313,744		480,117
Total gross loan, net of deferred fees	$	216,013	554,293	616,764		1,387,070
Loans maturing after one year with:
Fixed interest rates					$	875,991
Floating interest rates						295,066

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 loan 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 credit risk; however, still have 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, 2018
		Owner		Non-owner
(dollars in thousands)		occupied RE		occupied RE	Construction	Business	Total
Pass		$	368,266	394,880	68,415	238,167	1,069,728
Special mention			725	121	-	3,033	3,879
Substandard			3,129	4,165	-	3,148	10,442
Doubtful			-	-	-	-	-
		$	372,120	399,166	68,415	244,348	1,084,049

	December 31, 2017
		Owner		Non-owner
		occupied RE		occupied RE	Construction	Business	Total
Pass		$	312,628	306,965	51,179	215,729	886,501
Special mention			1,770	2,082	-	5,540	9,392
Substandard			2,420	3,751	-	4,889	11,060
Doubtful			-	-	-	-	-
		$	316,818	312,798	51,179	226,158	906,953

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


		September 30, 2018
		Owner		Non-owner
(dollars in thousands)		occupied RE		occupied RE	Construction	Business	Total
Current		$	372,120	398,973	68,415	244,246	1,083,754
30-59 days past due			-	-	-	13	13
60-89 days past due			-	-	-	-	-
Greater than 90 Days			-	193	-	89	282
		$	372,120	399,166	68,415	244,348	1,084,049

	December 31, 2017
		Owner		Non-owner
		occupied RE		occupied RE	Construction	Business	Total
Current		$	316,818	312,477	51,179	224,861	905,335
30-59 days past due			-	129	-	416	545
60-89 days past due			-	-	-	-	-
Greater than 90 Days			-	192	-	881	1,073
		$	316,818	312,798	51,179	226,158	906,953

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, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	305,496	160,544	38,015	22,999	527,054
Special mention		1,886	526	-	156	2,568
Substandard		3,889	2,584	-	57	6,530
Doubtful		-	-	-	-	-
	$	311,271	163,654	38,015	23,212	536,152

	December 31, 2017
	Real estate		Home equity	Construction	Other	Total
Pass	$	269,422	152,545	28,351	22,367	472,685
Special mention		715	1,025	-	88	1,828
Substandard		2,913	2,571	-	120	5,604
Doubtful		-	-	-	-	-
	$	273,050	156,141	28,351	22,575	480,117

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


	September 30, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	310,665	163,309	38,015	23,082	535,071
30-59 days past due		249	345	-	55	649
60-89 days past due		357	-	-	75	432
Greater than 90 Days		-	-	-	-	-
	$	311,271	163,654	38,015	23,212	536,152

	December 31, 2017
	Real estate		Home equity	Construction	Other	Total
Current	$	271,284	154,821	28,351	22,506	476,962
30-59 days past due		681	325	-	69	1,075
60-89 days past due		131	995	-	-	1,126
Greater than 90 Days		954	-	-	-	954
	$	273,050	156,141	28,351	22,575	480,117

As of September 30, 2018 and December 31, 2017, total loans 30 days or more past due represented 0.08% and 0.34% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.02% and 0.12% of the Company’s total loan portfolio as of September 30, 2018 and December 31, 2017, respectively. As of September 30, 2018 and December 31, 2017, consumer loans 30 days or more past due were 0.07% and 0.23% 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, 2018		December 31, 2017
Commercial
Owner occupied RE	$	-	-
Non-owner occupied RE		1,680	1,581
Construction		-	-
Business		89	910
Consumer
Real estate		1,153	992
Home equity		850	1,144
Construction		-	-
Other		-	1
Nonaccruing troubled debt restructurings		2,194	2,673
Total nonaccrual loans, including nonaccruing TDRs		5,966	7,301
Other real estate owned		117	242
Total nonperforming assets	$	6,083	7,543
Nonperforming assets as a percentage of:
Total assets		0.33%	0.46%
Gross loans		0.38%	0.54%
Total loans over 90 days past due		282	2,027
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	6,699	5,145

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, 2018
			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	$	2,843	2,779	452	75
Non-owner occupied RE		6,341	3,046	2,245	742
Construction		-	-	-	-
Business		3,791	2,583	1,924	843
Total commercial		12,975	8,408	4,621	1,660
Consumer
Real estate		2,930	2,831	2,172	1,214
Home equity		1,753	1,265	116	42
Construction		-	-	-	-
Other		161	161	161	19
Total consumer		4,844	4,257	2,449	1,275
Total	$	17,819	12,665	7,070	2,935


			December 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	$	2,281	2,235	464	179
Non-owner occupied RE		6,827	3,665	2,646	750
Construction		-	-	-	-
Business		3,735	2,764	1,993	1,061
Total commercial		12,843	8,664	5,103	1,990
Consumer
Real estate		2,062	2,037	2,037	1,379
Home equity		2,010	1,575	680	286
Construction		-	-	-	-
Other		171	170	170	22
Total consumer		4,243	3,782	2,887	1,687
Total	$	17,086	12,446	7,990	3,677

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, 2018			September 30, 2017
	Average		Recognized	Average		Recognized
	recorded		interest	recorded		interest
(dollars in thousands)	investment		income	investment		income
Commercial
Owner occupied RE	$	2,786	41	$	2,182	25
Non-owner occupied RE		3,048	29		4,322	57
Construction		-	-		-	-
Business		2,965	44		3,498	58
Total commercial		8,799	114		10,002	140
Consumer
Real estate		2,850	34		2,361	40
Home equity		1,273	17		196	2
Construction		-	-		-	-
Other		162	1		176	1
Total consumer		4,285	52		2,733	43
Total	$	13,084	166	$	12,735	183


	Nine months ended			Nine months ended				Year ended
	September 30, 2018			September 30, 2017			December 31, 2017
	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	$	2,792	103	$	2,198	78	2,255	104
Non-owner occupied RE		3,070	127		4,503	154	4,144	199
Construction		-	-		-	-	-	-
Business		3,031	123		3,585	165	2,823	162
Total commercial		8,893	353		10,286	397	9,222	465
Consumer
Real estate		2,871	114		2,370	73	2,047	69
Home equity		1,283	61		196	4	1,576	97
Construction		-	-		-	-	-	-
Other		164	4		178	4	174	6
Total consumer		4,318	179		2,744	81	3,797	172
Total	$	13,211	532	$	13,030	478	13,019	637

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, 2018
	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	$	2,699	3,581	544		3,849		3,446	1,431		282		268		16,100
Provision for loan losses		71	379	(44	)	(17	)	89	(93	)	(7	)	22		400
Loan charge-offs		-	-	-		(536	)	-	-		-		(20	)	(556	)
Loan recoveries		-	25	-		89		1	80		-		1		196
Net loan charge-offs		-	25	-		(447	)	1	80		-		(19	)	(360	)
Balance, end of period	$	2,770	3,985	500		3,385		3,536	1,418		275		271		16,140
Net charge-offs to average loans (annualized)															0.09%
Allowance for loan losses to gross loans															1.00%
Allowance for loan losses to nonperforming loans															270.53%


	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%


	Nine months ended September 30, 2018
	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	$	2,534		3,230		325		3,848		3,495		1,600		210	281		15,523
Provision for loan losses		236		857		175		(31	)	114		(157	)	65	41		1,300
Loan charge-offs		-		(234	)	-		(655	)	(76	)	(140	)	-	(54	)	(1,159	)
Loan recoveries		-		132		-		223		3		115		-	3		476
Net loan charge-offs		-		(102	)	-		(432	)	(73	)	(25	)	-	(51	)	(683	)
Balance, end of period	$	2,770		3,985		500		3,385		3,536		1,418		275	271		16,140
Net charge-offs to average loans (annualized)																	0.06%

	Nine months ended September 30, 2017
	Commercial									Consumer
	Owner			Non-owner
	occupied			occupied						Real		Home
	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%

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


	September 30, 2018
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,660	1,275	2,935	8,408	4,257	12,665
Collectively evaluated		8,990	4,225	13,205	1,075,641	531,895	1,607,536
Total	$	10,640	5,500	16,140	1,084,049	536,152	1,620,201

	December 31, 2017
	Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,990	1,687	3,677	8,664	3,782	12,446
Collectively evaluated		7,947	3,899	11,846	898,289	476,335	1,374,624
Total	$	9,937	5,586	15,523	906,953	480,117	1,387,070