NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES

Set forth below is selected data relating to the composition of the loan portfolio at December 31 (in thousands):





	December 31, 2016				December 31, 2015
Real Estate:
Residential	$	237,177	33.2	%	$	161,820	28.9	%
Commercial		320,187	44.8			279,123	49.8
Construction		19,709	2.8			18,987	3.4
Commercial, financial and agricultural		85,508	12.0			71,090	12.7
Consumer loans to individuals		51,524	7.2			29,231	5.2
Total loans		714,105	100.0	%		560,251	100.0	%

Deferred fees, net		(216)				(326)
Total loans receivable		713,889				559,925
Allowance for loan losses		(6,463)				(7,298)
Net loans receivable	$	707,426			$	552,627

The following table presents the components of the purchase accounting adjustments related to the purchased credit-impaired loans acquired:



(In Thousands)		July 31, 2016

Contractually required principal and interest	$	2,621
Non-accretable discount		(1,014)
Expected cash flows		1,607
Accretable discount		(239)
Estimated fair value	$	1,368

Changes in the accretable yield for purchased credit-impaired loans were as follows for the twelve months ended December 31:

(In thousands)



	2016		2015		2014
Balance at beginning of period	$	-	$	8	$	20
Additions		239		-		-
Accretion		(30)		(1)	(12)	(12)
Reclassification and other		(1)		(7)	-	-
Balance at end of period	$	208	$	-	$	8

The following table presents additional information regarding loans acquired and accounted for in accordance with ASC 310-30 (in thousands):



	December 31, 2016		December 31, 2015

Outstanding Balance	$	1,821	$	498
Carrying Amount	$	1,386	$	498

There were no material increases or decreases in the expected cash flows of these loans since the acquisition date. There has been no allowance for loan losses recorded for acquired loans with specific evidence of deterioration in credit quality. As of December 31, 2016, for loans that were acquired prior to 2016 with or without specific evidence of deterioration in credit quality, adjustments to the allowance for loan losses have been accounted for through the allowance for loan loss adequacy calculation. For loans that were acquired in 2016 with or without specific evidence of deterioration in credit quality, there were no adjustments to the allowance for loan losses calculation.

The Company maintains a loan review system, which allows for a periodic review of our loan portfolio and the early identification of potential impaired loans. The system takes into consideration, among other things, delinquency status, size of loans, type and market value of collateral and financial condition of the borrowers. Specific loan loss allowances are established for identified losses based on a review of such information. A loan evaluated for impairment is considered to be impaired when, based on current information and events, it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. All loans identified as impaired are evaluated independently. The Company does not aggregate such loans for evaluation purposes. Impairment is measured on a loan-by-loan basis for commercial and construction loans by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral-dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential mortgage loans for impairment disclosures, unless such loans are part of a larger relationship that is impaired, or are classified as a troubled debt restructuring.

The following tables show the amount of loans in each category that were individually and collectively evaluated for impairment at the dates indicated:



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2016
Individually evaluated for impairment	$	23	$	2,601	$	-	$	-	$	-	$	2,624
Loans acquired with deteriorated credit quality		821		565		-		-		-		1,386
Collectively evaluated for impairment		236,333		317,021		19,709		85,508		51,524		710,095
Total Loans	$	237,177	$	320,187	$	19,709	$	85,508	$	51,524	$	714,105



	Real Estate Loans
							Commercial		Consumer
	Residential		Commercial		Construction		Loans		Loans		Total
	(In thousands)
December 31, 2015
Individually evaluated for impairment	$	28	$	8,659	$	-	$	43	$	-	$	8,730
Loans acquired with deteriorated credit quality		140		358		-		-		-		498
Collectively evaluated for impairment		161,652		270,106		18,987		71,047		29,231		551,023
Total Loans	$	161,820	$	279,123	$	18,987	$	71,090	$	29,231	$	560,251

The following table includes the recorded investment and unpaid principal balances for impaired loans with the associated allowance amount, if applicable.



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance
December 31, 2016	(In thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	23	$	28	$	-
Commercial		2,601		3,427		-
Subtotal		2,624		3,455		-

Total:
Real Estate Loans
Residential		23		28		-
Commercial		2,601		3,427		-
Total Impaired Loans	$	2,624	$	3,455	$	-



			Unpaid
	Recorded		Principal		Associated
	Investment		Balance		Allowance

December 31, 2015	(In thousands)
With no related allowance recorded:
Real Estate Loans
Residential	$	168	$	173	$	-
Commercial		2,644		4,610		-
Commercial, financial and agricultural		43		43
Subtotal		2,855		4,826		-
With an allowance recorded:
Real Estate Loans
Commercial		6,373		6,446		1,613
Subtotal		6,373		6,446		1,613
Total:
Real Estate Loans
Residential		168		173		-
Commercial		9,017		11,056		1,613
Commercial, financial and agricultural		43		43		-
Total Impaired Loans	$	9,228	$	11,272	$	1,613

The following information for impaired loans is presented for the years ended December 31, 2016, 2015 and 2014:


	Average Recorded	Average Recorded					Interest Income
		Investment					Recognized
	2016		2015			2014	2016		2015			2014
	(In thousands)
Total:
Real Estate Loans
Residential	$	25	$	159	$	233	$	-	$	4	$	5
Commercial		2,671		8,847		7,492		91		526		503
Commercial Loans		-		9		-		-		2		-
Total Loans	$	2,696	$	9,015	$	7,725	$	91	$	532	$	508

Troubled debt restructured loans are those loans whose terms have been renegotiated to provide a reduction or deferral of principal or interest as a result of financial difficulties experienced by the borrower, who could not obtain comparable terms from alternate financing sources. As of December 31, 2016, troubled debt restructured loans totaled $1.5 million and resulted in specific reserves of $0. During 2016, there were no new loan relationships identified as troubled debt restructurings, while one loan with a balance of $5.0 million as of December 31, 2015 was transferred to Foreclosed Real Estate Owned during 2016 as a result of foreclosure on the property and one loan relationship with a balance of $82,000 as of December 31, 2015 was charged-off in 2016. During 2016, the Company recognized charge-offs totaling $2.6 million on loans classified as troubled debt restructurings.

As of December 31, 2015, troubled debt restructured loans totaled $6.8 million and resulted in specific reserves of $1,613,000. During 2015, there were two new loan relationships identified as troubled debt restructurings totaling $176,000 based on executed modification agreements, while one loan with a balance of $1.7 million as of December 31, 2014 was transferred to Foreclosed Real Estate Owned during 2015 as a result of foreclosure on the property. During 2015, the Company recognized charge-offs totaling $1.3 million on loans classified as troubled debt restructurings. Additionally, the Company recognized expenses of $322,000 in foreclosed real estate owned expense related to a property which was previously classified as a troubled debt restructuring.

Foreclosed assets acquired in settlement of loans are carried at fair value less estimated costs to sell and are included in foreclosed real estate owned on the Consolidated Balance Sheets. As of December 31, 2016 and 2015, foreclosed real estate owned totaled $5,302,000 and $2,847,000, respectively. As of December 31, 2016, included within foreclosed real estate owned is $297,000 of consumer residential mortgages that were foreclosed on or received via a deed in lieu transaction prior to the period end. As of December 31, 2016, the Company has initiated formal foreclosure proceedings on $421,000 of consumer residential mortgage loans.

Management uses an eight point internal risk rating system to monitor the credit quality of the overall loan portfolio. The first four categories are considered not criticized, and are aggregated as “Pass” rated. The criticized rating categories utilized by management generally follow bank regulatory definitions. The Special Mention category includes assets that are currently protected but are potentially weak, resulting in an undue and unwarranted credit risk, but not to the point of justifying a Substandard classification. Loans in the Substandard category have well-defined weaknesses that jeopardize the liquidation of the debt, and have a distinct possibility that some loss will be sustained if the weaknesses are not corrected. All loans greater than 90 days past due are considered Substandard. Any portion of a loan that has been charged off is placed in the Loss category.

To help ensure that risk ratings are accurate and reflect the present and future capacity of borrowers to repay a loan as agreed, the Company has a structured loan rating process with several layers of internal and external oversight. Generally, consumer and residential mortgage loans are included in the Pass categories unless a specific action, such as nonperformance, repossession, or death occurs to raise awareness of a possible credit event. The Company’s Loan Review Department is responsible for the timely and accurate risk rating of the loans on an ongoing basis. Every credit which must be approved by Loan Committee or the Board of Directors is assigned a risk rating at time of consideration. Loan Review also annually reviews relationships of $1,000,000 and over to assign or re-affirm risk ratings. Loans in the Substandard categories that are collectively evaluated for impairment are given separate consideration in the determination of the allowance.

The following table presents the classes of the loan portfolio summarized by the aggregate Pass and the criticized categories of Special Mention, Substandard, Doubtful and Loss within the internal risk rating system as of December 31, 2016 and December 31, 2015 (in thousands):



			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
December 31, 2016
Commercial real estate loans	$	310,432	$	5,432	$	4,323	$	-	$	-	$	320,187
Commercial		84,600		885		23		-		-		85,508
Total	$	395,032	$	6,317	$	4,346	$	-	$	-	$	405,695



			Special
	Pass		Mention		Substandard		Doubtful		Loss		Total
December 31, 2015
Commercial real estate loans	$	267,892	$	1,837	$	9,394	$	-	$	-	$	279,123
Commercial		71,047		-		43		-		-		71,090
Total	$	338,939	$	1,837	$	9,437	$	-	$	-	$	350,213

For residential real estate loans, construction loans and consumer loans, the Company evaluates credit quality based on the performance of the individual credits. Nonperforming loans include loans that have been placed on nonaccrual status and loans remaining in accrual status on which the contractual payment of principal and interest has become 90 days past due. The following table presents the recorded investment in the loan classes based on payment activity as of December 31, 2016 and December 31, 2015 (in thousands):



	Performing		Nonperforming		Total
December 31, 2016
Residential real estate loans	$	235,829	$	1,137	$	237,177
Construction		19,681		28		19,709
Consumer loans to individuals		51,524		-		51,524
Total	$	307,034	$	1,165	$	308,410



	Performing		Nonperforming		Total
December 31, 2015
Residential real estate loans	$	161,380	$	440	$	161,820
Construction		18,987		-		18,987
Consumer loans to individuals		29,231		-		29,231
Total	$	209,598	$	440	$	210,038

Management further monitors the performance and credit quality of the loan portfolio by analyzing the age of the portfolio as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the aging categories of performing loans and nonaccrual loans as of December 31, 2016 and December 31, 2015 (in thousands):



	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
December 31, 2016
Real Estate loans
Residential	$	234,790	$	986	$	264	$	1	$	1,136	$	2,387	$	237,177
Commercial		318,979		445		1		-		762		1,208		320,187
Construction		19,681		-		-		-		28		28		19,709
Commercial loans		85,355		143		10		-		-		153		85,508
Consumer loans		51,456		39		29		-		-		68		51,524
Total	$	710,261	$	1,613	$	304	$	1	$	1,926	$	3,844	$	714,105



	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due and still accruing		Non-Accrual		Total Past Due and Non-Accrual		Total Loans
December 31, 2015
Real Estate loans
Residential	$	160,683	$	646	$	51	$	-	$	440	$	1,137	$	161,820
Commercial		272,125		310		39		-		6,649		6,998		279,123
Construction		18,959		28		-		-		-		28		18,987
Commercial loans		71,043		4		-		-		43		47		71,090
Consumer loans		29,179		41		11		-		-		52		29,231
Total	$	551,989	$	1,029	$	101	$	-	$	7,132	$	8,262	$	560,251

The following table presents the allowance for loan losses by the classes of the loan portfolio:



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2015	$	1,069	$	5,506	$	90	$	397	$	236	$	7,298
Charge Offs		(123)		(2,711)		-		(15)		(102)		(2,951)
Recoveries		6		15		-		-		45		66
Provision for loan losses		140		1,813		(12)		(75)		184		2,050
Ending balance, December 31, 2016	$	1,092	$	4,623	$	78	$	307	$	363	$	6,463
Ending balance individually evaluated for impairment	$	-	$	3	$	-	$	-	$	-	$	3
Ending balance collectively evaluated for impairment	$	1,092	$	4,620	$	78	$	307	$	363	$	6,460



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2014	$	1,323	$	3,890	$	222	$	256	$	184	$	5,875
Charge Offs		(224)		(2,883)		-		-		(91)		(3,198)
Recoveries		20		-		-		-		21		41
Provision for loan losses		(50)		4,499		(132)		141		122		4,580
Ending balance, December 31, 2015	$	1,069	$	5,506	$	90	$	397	$	236	$	7,298
Ending balance individually evaluated for impairment	$	-	$	1,613	$	-	$	-	$	-	$	1,613
Ending balance collectively evaluated for impairment	$	1,069	$	3,893	$	90	$	397	$	236	$	5,685



(In thousands)	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Consumer		Total
Beginning balance, December 31, 2013	$	1,441	$	3,025	$	898	$	184	$	160	$	5,708
Charge Offs		(270)		(1,196)		-		-		(80)		(1,546)
Recoveries		-		2		-		-		31		33
Provision for loan losses		152		2,059		(676)		72		73		1,680
Ending balance, December 31, 2014	$	1,323	$	3,890	$	222	$	256	$	184	$	5,875
Ending balance individually evaluated for impairment	$	-	$	293	$	-	$	-	$	-	$	293
Ending balance collectively evaluated for impairment	$	1,323	$	3,597	$	222	$	256	$	184	$	5,582

The recorded investment in impaired loans, not requiring an allowance for loan losses was $2,624,000 (net of charge-offs against the allowance for loan losses of $831,000) and $2,855,000 (net of charge-offs against the allowance for loan losses of $1,971,000) at December 31, 2016 and 2015, respectively. The recorded investment in impaired loans requiring an allowance for loan losses was $0 and $6,373,000 (net of a charge-off against the allowance for loan losses of $73,000) at December 31, 2016 and 2015, respectively. The specific reserve related to impaired loans was $0 for 2016 and $1,613,000 for 2015. For the years ended December 31, 2016 and 2015, the average recorded investment in these impaired loans was $2,696,000, and $9,015,000, respectively, and the interest income recognized on these impaired loans was $91,000 and $532,000, respectively.

During the period ended December 31, 2016, the allowance for commercial real estate loans decreased from $5,506,000 to $4,623,000. This $883,000 decrease in the required allowance was due to a $1,610,000 decrease in the specific reserve component resulting from the transfer of an impaired loan with a specific reserve allowance of $1,596,000 at December 31, 2015 to foreclosed real estate during 2016. This reduction was partially offset by a $419,000 increase in the allowance for commercial real estate loans due to an increase in the historical loss factor from 0.70% at December 31, 2015 to 0.80% on December 31, 2016.

During the period ended December 31, 2015, the allowance for residential real estate loans decreased from $1,323,000 to $1,069,000. This $254,000 decrease in the required allowance was due primarily to a decrease in the historical loss factor from 0.30% at December 31, 2014 to 0.23% on December 31, 2015. During the same period, the required allowance for commercial real estate loans increased from $3,890,000 at December 31, 2014 to $5,506,000 on December 31, 2015. This increase can be attributed to a $1,320,000 increase in the specific reserve component.

Interest income that would have been recorded on loans accounted for on a non-accrual basis under the original terms of the loans was $163,000, $515,000 and $451,000 for 2016, 2015 and 2014, respectively.

As of December 31, 2016 and 2015, the Company considered its concentration of credit risk to be acceptable. As of December 31, 2016, the highest concentrations are in commercial rentals and the hospitality lodging industry, with loans outstanding of $71.8 million, or 70.7% of bank capital, to commercial rentals, and $50.9 million, or 50.1% of bank capital to the hospitality and lodging industry. Charge-offs on loans within these concentrations were $31,000, $643,000 and $422,000 for the years ended December 31, 2016, 2015 and 2014, respectively.

Gross realized gains and gross realized losses on sales of residential mortgage loans were $54,000 and $0, respectively, in 2016 compared to $113,000 and $0, respectively, in 2015 and $150,000 and $0, respectively, in 2014. The proceeds from the sales of residential mortgage loans totaled $1.7 million, $4.4 million and $4.4 million for the years ended December 31, 2016, 2015 and 2014, respectively. As of December 31, 2016 and 2015, the outstanding value of loans serviced for others totaled $35.5 million and $32.9 million, respectively.