NOTE 4 – ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY OF FINANCING RECEIVABLES

The following table presents changes in the allowance for loan losses disaggregated by the class of loans receivable for the three and nine months ended September 30, 2015 and 2014:


	Commercial				Commercial		Residential		Consumer
	and				Real		Real		and
(Dollars in thousands)	Industrial		Construction		Estate		Estate		Other		Unallocated		Total

Three Months Ended:
September 30, 2015
Beginning balance	$	86	$	277	$	3,613	$	898	$	86	$	792	$	5,752
Charge-offs		-		-		(119)		-		(6)		-		(125)
Recoveries		5		-		3		4		1		-		13
Provision		(8)		(57)		134		26		5		(99)		1
Ending balance	$	83	$	220	$	3,631	$	928	$	86	$	693	$	5,641

September 30, 2014
Beginning balance	$	257		354		3,750		837		13		643	$	5,854
Charge-offs		-		-		(495)		(33)		(9)		-		(537)
Recoveries		1		-		10		1		2		-		14
Provision		18		(53)		134		14		20		245		378
Ending balance	$	276	$	301	$	3,399	$	819	$	26	$	888	$	5,709

Nine Months Ended:
September 30, 2015
Beginning balance	$	231	$	383	$	3,491	$	903	$	19	$	614	$	5,641
Charge-offs		(19)		-		(542)		-		(17)		-		(578)
Recoveries		10		-		39		17		6		-		72
Provision		(139)		(163)		643		8		78		79		506
Ending balance	$	83	$	220	$	3,631	$	928	$	86	$	693	$	5,641

September 30, 2014
Beginning balance	$	222		308	$	3,399	$	941	$	16	$	535	$	5,421
Charge-offs		(1)		-		(853)		(118)		(31)		-		(1,003)
Recoveries		16		-		31		5		8		-		60
Provision		39		(7)		822		(9)		33		353		1,231
Ending balance	$	276	$	301	$	3,399	$	819	$	26	$	888	$	5,709

The following table presents the balance of the allowance of loan losses and loans receivable by class at September 30, 2015 and December 31, 2014 disaggregated on the basis of our impairment methodology.



	Allowance for Loan Losses						Loans Receivable
			Balance		Balance
			Related to		Related to
			Loans		Loans
			Individually		Collectively				Individually		Collectively
			Evaluated for		Evaluated for				Evaluated for		Evaluated for
(Dollars in thousands)	Balance		Impairment		Impairment		Balance		Impairment		Impairment

September 30, 2015
Commercial and industrial	$	83	$	-	$	83	$	17,842	$	20	$	17,822
Construction		220		-		220		10,206		-		10,206
Commercial real estate		3,631		117		3,514		347,095		5,194		341,901
Residential real estate		928		205		723		125,159		1,893		123,266
Consumer and other loans		86		73		13		1,317		138		1,179
Unallocated		693		-		-		-		-		-
Total	$	5,641	$	395	$	4,553	$	501,619	$	7,245	$	494,374

December 31, 2014
Commercial and industrial	$	231	$	51	$	180	$	20,549	$	94	$	20,455
Construction		383		-		383		12,379		-		12,379
Commercial real estate		3,491		136		3,355		326,370		5,105		321,265
Residential real estate		903		101		802		111,498		2,314		109,184
Consumer and other loans		19		-		19		1,665		-		1,665
Unallocated		614		-		-		-		-		-
Total	$	5,641	$	288	$	4,739	$	472,461	$	7,513	$	464,948

An age analysis of loans receivable, which were past due as of September 30, 2015 and December 31, 2014, is as follows:



													Recorded
													Investment
					Greater						Total		> 90 Days
	30-59 Days		60-89 days		Than		Total Past				Financing		and
(Dollars in thousands)	Past Due		Past Due		90 Days (a)		Due		Current		Receivables		Accruing

September 30, 2015
Commercial and industrial	$	6	$	-	$	20	$	26	$	17,816	$	17,842	$	-
Construction		-		-		-		-		10,206		10,206		-
Commercial real estate		913		1,079		4,043		6,035		341,060		347,095		-
Residential real estate		433		-		1,481		1,914		123,245		125,159		-
Consumer and other		5		-		138		143		1,174		1,317		-
Total	$	1,357	$	1,079	$	5,682	$	8,118	$	493,501	$	501,619	$	-

December 31, 2014
Commercial and industrial	$	9	$	-	$	94	$	103	$	20,446	$	20,549	$	-
Construction		1,354		-		-		1,354		11,025		12,379		-
Commercial real estate		2,395		1,209		3,936		7,540		318,830		326,370		-
Residential real estate		555		108		1,978		2,641		108,857		111,498		85
Consumer and other		5		-		1		6		1,659		1,665		-
Total	$	4,318	$	1,317	$	6,009	$	11,644	$	460,817	$	472,461	$	85


(a) includes loans greater than 90 days past due and still accruing and non-accrual loans.

Loans for which the accrual of interest has been discontinued at September 30, 2015 and December 31, 2014 were:



(Dollars in thousands)	September 30, 2015		December 31, 2014

Commercial and industrial	$	20	$	94
Commercial real estate		4,043		3,936
Residential real estate		1,481		1,893
Consumer and other		138		1
Total	$	5,682	$	5,924

In determining the adequacy of the allowance for loan losses, we estimate losses based on the identification of specific problem loans through our credit review process and also estimate losses inherent in other loans on an aggregate basis by loan type. The credit review process includes the independent evaluation of the loan officer, and assigned risk ratings by the Chief Credit Officer and a third party loan review company. Such risk ratings are assigned loss component factors that reflect our loss estimate for each group of loans. It is management’s and the Board of Directors’ responsibility to oversee the lending process to ensure that all credit risks are properly identified, monitored, and controlled, and that loan pricing, terms and other safeguards against non-performance and default are commensurate with the level of risk undertaken and is rated as such based on a risk-rating system. Factors considered in assigning risk ratings and loss component factors include: borrower specific information related to expected future cash flows and operating results, collateral values, financial condition and payment status; levels of and trends in portfolio charge-offs and recoveries; levels in portfolio delinquencies; effects of changes in loan concentrations and observed trends in the economy and other qualitative measurements.

Our risk-rating system is consistent with the classification system used by regulatory agencies and with industry practices. Loan classifications of Substandard, Doubtful or Loss are consistent with the regulatory definitions of classified assets. The classification system is as follows:

Pass: This category represents loans performing to contractual terms and conditions and the primary source of repayment is adequate to meet the obligation. We have five categories within the Pass classification depending on strength of repayment sources, collateral values and financial condition of the borrower.

Special Mention: This category represents loans performing to contractual terms and conditions; however the primary source of repayment or the borrower is exhibiting some deterioration or weaknesses in financial condition that could potentially threaten the borrowers’ future ability to repay our loan principal and interest or fees due.

Substandard: This category represents loans that the primary source of repayment has significantly deteriorated or weakened which has or could threaten the borrowers’ ability to make scheduled payments. The weaknesses require close supervision by management and there is a distinct possibility that we could sustain some loss if the deficiencies are not corrected. Such weaknesses could jeopardize the timely and ultimate collection of our loan principal and interest or fees due. Loss may not be expected or evident, however, loan repayment is inadequately supported by current financial information or pledged collateral.

Doubtful: Loans so classified have all the inherent weaknesses of a substandard loan with the added provision that collection or liquidation in full is highly questionable and not reasonably assured. The probability of at least partial loss is high, but extraneous factors might strengthen the asset to prevent loss. The validity of the extraneous factors must be continuously monitored. Once these factors are questionable the loan should be considered for full or partial charge-off.

Loss: Loans so classified are considered uncollectible, and of such little value that their continuance as active assets is not warranted. Such loans are fully charged off.

The following tables illustrate our corporate credit risk profile by creditworthiness category as of September 30, 2015 and December 31, 2014:



			Special
(Dollars in thousands)	Pass		Mention		Substandard		Doubtful		Total
September 30, 2015
Commercial and industrial	$	17,800	$	22	$	20	$	-	$	17,842
Construction		10,206		-		-		-		10,206
Commercial real estate		333,463		7,670		5,962		-		347,095
Residential real estate		122,383		751		2,025		-		125,159
Consumer and other		1,179		-		138		-		1,317
	$	485,031	$	8,443	$	8,145	$	-	$	501,619

December 31, 2014
Commercial and industrial	$	20,446	$	9	$	94	$	-	$	20,549
Construction		12,379		-		-		-		12,379
Commercial real estate		312,172		8,257		5,941		-		326,370
Residential real estate		108,587		457		2,454		-		111,498
Consumer and other		1,527		138		-		-		1,665
	$	455,111	$	8,861	$	8,489	$	-	$	472,461

The following table reflects information about our impaired loans by class as of September 30, 2015 and December 31, 2014:



		September 30, 2015						December 31, 2014
			Unpaid						Unpaid
	Recorded		Principal		Related		Recorded		Principal		Related
(Dollars in thousands)	Investment		Balance		Allowance		Investment		Balance		Allowance

With no related allowance recorded:
Commercial and industrial	$	20	$	20	$	-	$	-	$	-	$	-
Commercial real estate		2,715		2,715		-		3,167		3,736		-
Residential real estate		599		598		-		1,829		1,835		-

With an allowance recorded:
Commercial and industrial		-		-		-		94		94		51
Commercial real estate		2,479		2,479		117		1,938		1,938		136
Residential real estate		1,294		1,304		205		485		489		101
Consumer and other		138		138		73		-		-		-

Total:
Commercial and industrial		20		20		-		94		94		51
Commercial real estate		5,194		5,194		117		5,105		5,674		136
Residential real estate		1,893		1,902		205		2,314		2,324		101
Consumer and other		138		138		73		-		-		-
	$	7,245	$	7,254	$	395	$	7,513	$	8,092	$	288

The following table presents the average recorded investment and income recognized for the three and nine months ended September 30, 2015 and 2014:


	For the Three Months Ended September 30, 2015				For the Three Months Ended September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	20	$	-	$	-	$	-
Commercial real estate		2,119		10		4,080		4
Residential real estate		904		1		1,818		5
Total impaired loans without a related allowance		3,043		11		5,898		9

With an allowance recorded:
Commercial real estate		2,762		8		4,309		29
Residential real estate		992		3		485		-
Consumer and other		104		-		1		-
Total impaired loans with an allowance		3,858		11		4,825		30
Total impaired loans	$	6,901	$	22	$	10,723	$	39


	For the Nine Months Ended September 30, 2015				For the Nine Months Ended September 30, 2014
	Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income
(Dollars in thousands)	Investment		Recognized		Investment		Recognized
With no related allowance recorded:
Commercial and industrial	$	15	$	-	$	-	$	-
Commercial real estate		2,439		24		4,999		22
Residential real estate		1,267		5		1,831		34
Total impaired loans without a related allowance		3,721		29		6,830		56

With an allowance recorded:
Commercial and industrial		24		-		15		1
Commercial real estate		2,764		25		4,339		30
Residential real estate		753		8		667		7
Consumer and other		104		-		1		-
Total impaired loans with an allowance		3,645		33		5,022		38
Total impaired loans	$	7,366	$	62	$	11,852	$	94

We recognize interest income on performing impaired loans as payments are received. On non-performing impaired loans we do not recognize interest income as all payments are recorded as a reduction of principal on such loans.

Impaired loans include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, postponement or forgiveness of principal, forbearance or other actions intended to maximize collection. The concessions rarely result in the forgiveness of principal or accrued interest. In addition, we attempt to obtain additional collateral or guarantor support when modifying such loans. Non-accruing restructured loans may be returned to accrual status when there has been a sustained period of repayment performance (generally six consecutive months of payments) and both principal and interest are deemed collectible.

The following table presents the recorded investment in troubled debt restructured loans, based on payment performance status:



(Dollars in thousands)		Commercial Real Estate	Residential Real Estate		Total

September 30, 2015
Performing	$	1,151	$	412	$	1,563
Non-performing		1,834		223		2,057
Total	$	2,985	$	635	$	3,620

December 31, 2014
Performing	$	1,169	$	421	$	1,590
Non-performing		2,730		224		2,954
Total	$	3,899	$	645	$	4,544

Troubled debt restructured loans are considered impaired and are included in the previous impaired loans disclosures in this footnote. As of September 30, 2015, we have not committed to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings.

There were no troubled debt restructurings that occurred during the three and nine months ended September 30, 2015 and 2014.

There were no troubled debt restructurings for which there was a payment default within twelve months following the date of the restructuring for the three and nine months ended September 30, 2015 and 2014.

We may obtain physical possession of residential real estate collateralizing a consumer mortgage loan via foreclosure on an in-substance repossession. As of September 30, 2015, we did not hold any foreclosed residential real estate properties as a result of obtaining physical possession. In addition, as of September 30, 2015, we had consumer loans with a carrying value of $1.3 million collateralized by residential real estate property for which formal foreclosure proceedings were in process.