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 $2.9 million as of March 31, 2019 and $2.8 million as of December 31, 2018.


	March 31, 2019				December 31, 2018
(dollars in thousands)	Amount			% of Total	Amount			% of Total
Commercial
Owner occupied RE	$	386,256		22.3%	$	367,018		21.9%
Non-owner occupied RE		423,953		24.4%		404,296		24.1%
Construction		80,561		4.7%		84,411		5.0%
Business		281,502		16.2%		272,980		16.3%
Total commercial loans		1,172,272		67.6%		1,128,705		67.3%
Consumer
Real estate		330,538		19.1%		320,943		19.1%
Home equity		167,146		9.6%		165,937		9.9%
Construction		39,838		2.3%		37,925		2.3%
Other		24,170		1.4%		23,822		1.4%
Total consumer loans		561,692		32.4%		548,627		32.7%
Total gross loans, net of deferred fees		1,733,964		100.0%		1,677,332		100.0%
Less—allowance for loan losses		(16,051	)			(15,762	)
Total loans, net	$	1,717,913			$	1,661,570

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, 2019
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	21,648	165,318	199,290		386,256
Non-owner occupied RE		41,795	244,292	137,866		423,953
Construction		18,526	35,798	26,237		80,561
Business		80,049	141,048	60,405		281,502
Total commercial loans		162,018	586,456	423,798		1,172,272
Consumer
Real estate		24,754	73,030	232,754		330,538
Home equity		8,127	26,423	132,596		167,146
Construction		15,122	877	23,839		39,838
Other		7,473	12,121	4,576		24,170
Total consumer loans		55,476	112,451	393,765		561,692
Total gross loans, net of deferred fees	$	217,494	698,907	817,563		1,733,964
Loans maturing after one year with:
Fixed interest rates					$	1,155,862
Floating interest rates						360,608

	December 31, 2018
			After one
		One year	but within	After five
(dollars in thousands)		or less	five years	years		Total
Commercial
Owner occupied RE	$	20,839	165,436	180,743		367,018
Non-owner occupied RE		43,000	227,454	133,842		404,296
Construction		22,941	33,045	28,425		84,411
Business		80,672	128,911	63,397		272,980
Total commercial loans		167,452	554,846	406,407		1,128,705
Consumer
Real estate		29,301	70,467	221,175		320,943
Home equity		8,867	24,618	132,452		165,937
Construction		16,006	1,646	20,273		37,925
Other		7,681	11,253	4,888		23,822
Total consumer		61,855	107,984	378,788		548,627
Total gross loan, net of deferred fees	$	229,307	662,830	785,195		1,677,332
Loans maturing after one year with :
Fixed interest rates					$	1,100,854
Floating interest rates						347,171

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.


	March 31, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	382,553	415,897	80,494	275,450	1,154,394
Special mention		1,495	4,261	67	1,967	7,790
Substandard		2,208	3,795	-	4,085	10,088
Doubtful		-	-	-	-	-
	$	386,256	423,953	80,561	281,502	1,172,272

	December 31, 2018
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	363,621	400,266	84,411	266,898	1,115,196
Special mention		296	118	-	2,971	3,385
Substandard		3,101	3,912	-	3,111	10,124
Doubtful		-	-	-	-	-
	$	367,018	404,296	84,411	272,980	1,128,705

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


	March 31, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	386,146	423,953	80,561	281,430	1,172,090
30-59 days past due		110	-	-	-	110
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	-	-	72	72
	$	386,256	423,953	80,561	281,502	1,172,272

	December 31, 2018
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	367,018	404,179	84,411	272,864	1,128,472
30-59 days past due		-	117	-	36	153
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	-	-	80	80
	$	367,018	404,296	84,411	272,980	1,128,705

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, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	324,421	163,989	39,838	24,007	552,255
Special mention		2,428	415	-	127	2,970
Substandard		3,689	2,742	-	36	6,467
Doubtful		-	-	-	-	-
	$	330,538	167,146	39,838	24,170	561,692

	December 31, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	314,586	162,626	37,925	23,586	538,723
Special mention		1,792	864	-	139	2,795
Substandard		4,565	2,447	-	97	7,109
Doubtful		-	-	-	-	-
	$	320,943	165,937	37,925	23,822	548,627

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


	March 31, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	328,378	166,632	39,838	24,140	558,988
30-59 days past due		656	246	-	30	932
60-89 days past due		862	-	-	-	862
Greater than 90 Days		642	268	-	-	910
	$	330,538	167,146	39,838	24,170	561,692

					December 31, 2018
(dollars in thousands)		Real estate	Home equity	Construction	Other	Total
Current	$	317,267	165,727	37,925	23,603	544,522
30-59 days past due		2,555	30	-	106	2,691
60-89 days past due		923	-	-	113	1,036
Greater than 90 Days		198	180	-	-	378
	$	320,943	165,937	37,925	23,822	548,627

As of March 31, 2019 and December 31, 2018, loans 30 days or more past due represented 0.17% and 0.26% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.01% of the Company’s total loan portfolio as of March 31, 2019 and December 31, 2018, while consumer loans 30 days or more past due were 0.16% and 0.25% of total loans as of March 31, 2019 and December 31, 2018, 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, 2019		December 31, 2018
Commercial
Owner occupied RE	$	-	-
Non-owner occupied RE		403	210
Construction		-	-
Business		72	81
Consumer
Real estate		1,840	1,980
Home equity		1,249	1,006
Construction		-	-
Other		-	12
Nonaccruing troubled debt restructurings		2,485	2,541
Total nonaccrual loans, including nonaccruing TDRs		6,049	5,830
Other real estate owned		-	-
Total nonperforming assets	$	6,049	5,830
Nonperforming assets as a percentage of:
Total assets		0.30%	0.31%
Gross loans		0.35%	0.35%
Total loans over 90 days past due		982	458
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	6,839	6,742

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, 2019
			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	$	2,816	2,751	449	75
Non-owner occupied RE		2,977	2,953	1,773	546
Construction		-	-	-	-
Business		3,242	2,615	1,998	946
Total commercial		9,035	8,319	4,220	1,567
Consumer
Real estate		2,755	2,748	1,264	414
Home equity		1,704	1,665	268	95
Construction		-	-	-	-
Other		156	156	156	18
Total consumer		4,615	4,569	1,688	527
Total	$	13,650	12,888	5,908	2,094

			December 31, 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	$	2,827	2,762	451	75
Non-owner occupied RE		3,321	2,807	2,204	558
Construction		-	-	-	-
Business		3,745	2,520	2,005	895
Total commercial		9,893	8,089	4,660	1,528
Consumer
Real estate		2,993	2,892	1,398	456
Home equity		1,935	1,421	-	-
Construction		-	-	-	-
Other		170	170	170	30
Total consumer		5,098	4,483	1,568	486
Total	$	14,991	12,572	6,228	2,014

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, 2019			March 31, 2018		December 31, 2018
	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	$	2,757	30	2,231	17	2,784	142
Non-owner occupied RE		2,977	49	3,758	50	2,860	174
Construction		-	-	-	-	-	-
Business		2,567	40	1,886	21	2,883	162
Total commercial		8,301	119	7,875	88	8,527	478
Consumer
Real estate		2,761	25	2,814	41	2,930	151
Home equity		1,677	30	2,203	28	1,453	99
Construction		-	-	-	-	-	-
Other		157	1	168	1	174	5
Total consumer		4,595	56	5,185	70	4,557	255
Total	$	12,896	175	13,060	158	13,084	733

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, 2019
	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	$	2,726	3,811	615		3,616	3,081		1,348	275	290		15,762
Provision for loan losses		57	74	(43	)	171	(56	)	61	7	29		300
Loan charge-offs		-	-	-		-	-		-	-	(41	)	(41	)
Loan recoveries		-	1	-		9	16		1	-	3		30
Net loan charge-offs		-	1	-		9	16		1	-	(38	)	(11	)
Balance, end of period	$	2,783	3,886	572		3,796	3,041		1,410	282	281		16,051
Net charge-offs to average loans (annualized)													0.00%
Allowance for loan losses to gross loans													0.93%
Allowance for loan losses to nonperforming loans													265.35%


	Three months ended March 31, 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		146	135	90	(294	)	(105	)	451		46	31		500
Loan charge-offs		-	-	-	(119	)	-		(140	)	-	(34	)	(293	)
Loan recoveries		-	1	-	118		1		-		-	2		122
Net loan charge-offs		-	1	-	(1	)	1		(140	)	-	(32	)	(171	)
Balance, end of period	$	2,680	3,366	415	3,553		3,391		1,911		256	280		15,852
Net charge-offs to average loans (annualized)														0.05%
Allowance for loan losses to gross loans														1.09%
Allowance for loan losses to nonperforming loans														217.92%

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


	March 31, 2019
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,567	527	2,094	8,319	4,569	12,888
Collectively evaluated		9,470	4,487	13,957	1,163,953	557,123	1,721,076
Total	$	11,037	5,014	16,051	1,172,272	561,692	1,733,964

	December 31, 2018
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,528	486	2,014	8,089	4,483	12,572
Collectively evaluated		9,240	4,508	13,748	1,120,616	544,144	1,664,760
Total	$	10,768	4,994	15,762	1,128,705	548,627	1,677,332