Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2014

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

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 $1.6 million and $1.3 million as of March 31, 2014 and December 31, 2013, respectively.

	March  31, 2014		December 31, 2013
(dollars in thousands)	Amount	%  of Total	Amount	%  of Total
Commercial
Owner occupied RE	$188,944	24.3%	$185,129	25.1%
Non-owner occupied RE	174,899	22.5%	166,016	22.5%
Construction	38,162	4.9%	30,906	4.2%
Business	138,077	17.7%	129,687	17.6%
Total commercial loans	540,082	69.4%	511,738	69.4%
Consumer
Real estate	120,597	15.4%	114,201	15.5%
Home equity	84,185	10.8%	78,479	10.6%
Construction	20,710	2.7%	19,888	2.7%
Other	13,224	1.7%	12,961	1.8%
Total consumer loans	238,716	30.6%	225,529	30.6%
Total gross loans, net of deferred fees	778,798	100.0%	737,267	100.0%
Less—allowance for loan losses	(10,713)		(10,213)
Total loans, net	$768,085		$727,054

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, 2014
(dollars in thousands)		One year or less	After one but within five years	After five years	Total
Commercial
Owner occupied RE		$  22,948	99,808	66,188	188,944
Non-owner occupied RE		46,875	97,664	30,360	174,899
Construction		11,769	14,407	11,986	38,162
Business		72,788	57,396	7,893	138,077
Total commercial loans		154,380	269,275	116,427	540,082
Consumer
Real estate		18,471	35,279	66,847	120,597
Home equity		5,874	28,589	49,722	84,185
Construction		9,309	1,708	9,693	20,710
Other		6,541	5,444	1,239	13,224
Total consumer loans		40,195	71,020	127,501	238,716
Total gross loans, net of deferred fees		$194,575	340,295	243,928	778,798
Loans maturing after one year with:
Fixed interest rates					$412,367
Floating interest rates					171,857
			December 31, 2013
		One year or less	After one but within five years	After five years	Total
	Commercial
	Owner occupied RE	$  26,959	93,377	64,793	185,129
	Non-owner occupied RE	45,937	96,891	23,188	166,016
	Construction	11,619	13,844	5,443	30,906
	Business	63,720	58,780	7,187	129,687
	Total commercial loans	148,235	262,892	100,611	511,738
	Consumer
	Real estate	18,397	34,068	61,736	114,201
	Home equity	4,988	26,319	47,172	78,479
	Construction	11,749	1,709	6,430	19,888
	Other	6,451	5,334	1,176	12,961
	Total consumer	41,585	67,430	116,514	225,529
	Total gross loan, net of deferred fees	$189,820	330,322	217,125	737,267
	Loans maturing after one year with :
	Fixed interest rates				$380,476
	Floating interest rates				166,971

Portfolio Segment Methodology

Commercial

Commercial loans are assessed for estimated losses by grading each loan using various risk factors identified through periodic reviews. We apply historic grade-specific loss factors to each class of loan.  In the development of our statistically derived loan grade loss factors, we observe historical losses over 12 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, we determine the allowance on a collective basis utilizing historical losses over 12 quarters to represent our best estimate of inherent loss. We pool 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 our 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 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.

				March 31, 2014
(dollars in thousands)	Owner occupied RE	Non-owner  occupied RE	Construction	Business	Total
Pass	$179,677	157,864	35,083	128,237	500,861
Special mention	6,045	7,039	-	4,026	17,110
Substandard	3,222	9,996	3,079	5,814	22,111
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$188,944	174,899	38,162	138,077	540,082

				December 31, 2013
	Owner  occupied RE	Non-owner  occupied RE	Construction	Business	Total
Pass	$176,320	147,378	27,797	120,254	471,749
Special mention	5,563	7,987	-	3,629	17,179
Substandard	3,246	10,651	3,109	5,804	22,810
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$185,129	166,016	30,906	129,687	511,738

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

					March 31, 2014
(dollars in thousands)	Owner  occupied RE	Non-owner  occupied RE		Construction	Business		Total
Current	$187,179	167,711		37,275	136,798		528,963
30-59 days past due	105	1,911		-	237		2,253
60-89 days past due	931	1,521		-	292		2,744
Greater than 90 Days	729	3,756		887	750		6,122
	$188,944	174,899		38,162	138,077		540,082
						December 31, 2013
	Owner  occupied RE		Non-owner  occupied RE	Construction		Business	Total
Current	$183,609		161,758	29,992		128,883	504,242
30-59 days past due	791		859	-		44	1,694
60-89 days past due	-		-	-		-	-
Greater than 90 Days	729		3,399	914		760	5,802
	$185,129		166,016	30,906		129,687	511,738

As of March 31, 2014 and December 31, 2013, loans 30 days or more past due represented 1.63% and 1.29% of our total loan portfolio, respectively.  Commercial loans 30 days or more past due were 1.43% and 1.02% of our total loan portfolio as of March 31, 2014 and December 31, 2013, respectively.  

Consumer

We manage a consistent process for assessing consumer loan credit quality by monitoring our loan grading trends and past due statistics.  All loans are subject to individual risk assessment. Our categories include Pass, Special Mention, Substandard, Doubtful, which are defined above.  Delinquency statistics are also an important indicator of credit quality in the establishment of our allowance for loan losses.

The tables below provide a breakdown of outstanding consumer loans by risk category.

				March 31, 2014
(dollars in thousands)	Real estate	Home equity	Construction	Other	Total
Pass	$116,289	80,261	20,710	12,909	230,169
Special mention	1,415	3,100	-	209	4,724
Substandard	2,893	824	-	106	3,823
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$120,597	84,185	20,710	13,224	238,716

				December 31, 2013
	Real estate	Home equity	Construction	Other	Total
Pass	$110,304	75,304	19,888	12,641	218,137
Special mention	1,455	2,176	-	212	3,843
Substandard	2,442	999	-	108	3,549
Doubtful	-	-	-	-	-
Loss	-	-	-	-	-
	$114,201	78,479	19,888	12,961	225,529

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

				March 31, 2014
(dollars in thousands)	Real estate	Home equity	Construction	Other	Total
Current	$119,192	84,055	20,710	13,195	237,152
30-59 days past due	331	130	-	28	489
60-89 days past due	-	-	-	1	1
Greater than 90 Days	1,074	-	-	-	1,074
	$120,597	84,185	20,710	13,224	238,716
				December 31, 2013
	Real estate	Home equity	Construction	Other	Total
Current	$112,314	78,402	19,888	12,877	223,481
30-59 days past due	806	-	-	84	890
60-89 days past due	467	-	-	-	467
Greater than 90 Days	614	77	-	-	691
	$114,201	78,479	19,888	12,961	225,529

As of March 31, 2014 and December 31, 2013, consumer loans 30 days or more past due were 0.20% and 0.28%, respectively, of total loans.

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 we believe, 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, 2014	December 31, 2013
Commercial
Owner occupied RE	$  1,191	1,199
Non-owner occupied RE	339	373
Construction	887	914
Business	542	712
Consumer
Real estate	528	76
Home equity	-	77
Construction	-	-
Other	2	3
Nonaccruing troubled debt restructurings	5,365	4,983
Total nonaccrual loans, including nonaccruing TDRs	8,854	8,337
Other real estate owned	1,148	1,198
Total nonperforming assets	$10,002	9,535
Nonperforming assets as a percentage of:
Total assets	1.07%	1.07%
Gross loans	1.28%	1.29%
Total loans over 90 days past due	7,196	6,493
Loans over 90 days past due and still accruing	-	-
Accruing troubled debt restructurings	$  7,536	8,045

Impaired Loans

The table below summarizes key information for impaired loans. Our 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.  Our commercial and consumer impaired loans are evaluated individually to determine the related allowance for loan losses.

		March 31, 2014
		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	$  1,926	1,926	1,666	333
Non-owner occupied RE	5,926	5,157	4,819	1,554
Construction	4,529	1,787	1,787	194
Business	5,574	4,764	2,916	1,984
Total commercial	17,955	13,634	11,188	4,065
Consumer
Real estate	2,399	2,377	2,020	844
Home equity	162	162	162	162
Construction	-	-	-	-
Other	217	217	-	-
Total consumer	2,778	2,756	2,182	1,006
Total	$20,733	16,390	13,370	5,071

		December 31, 2013
		Recorded investment
			Impaired loans
	Unpaid		with related	Related
	Principal	Impaired	allowance for	allowance for
	Balance	loans	loan losses	loan losses
Commercial
Owner occupied RE	$1,935	1,935	1,666	333
Non-owner occupied RE	5,957	5,622	6,125	1,441
Construction	4,612	1,870	1,855	246
Business	5,494	4,684	2,807	1,813
Total commercial	17,998	14,111	12,453	3,833
Consumer
Real estate	1,829	1,807	1,447	704
Home equity	239	239	239	188
Construction	-	-	-	-
Other	225	225	4	4
Total consumer	2,293	2,271	1,690	896
Total	$20,291	16,382	14,143	4,729

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 March 31, 2014		Three months ended March 31, 2013		Year ended December 31, 2013
(dollars in thousands)	Average recorded investment	Recognized interest income	Average recorded investment	Recognized interest income	Average recorded investment	Recognized interest income
Commercial
Owner occupied RE	$  1,930	2	1,693	2	1,519	47
Non-owner occupied RE	5,417	15	6,505	73	5,932	261
Construction	1,829	14	2,082	10	2,054	57
Business	4,724	40	4,167	25	4,521	189
Total commercial	13,900	71	14,447	110	14,026	554
Consumer
Real estate	2,092	12	984	8	1,186	100
Home equity	264	2	769	2	610	8
Construction	-	-	-	-	-	-
Other	221	2	247	2	234	9
Total consumer	2,577	16	2,000	12	2,030	117
Total	$ 16,477	87	16,447	122	16,056	671

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.  

We have an established process to determine the adequacy of the allowance for loan losses that assesses the losses inherent in our portfolio. While we attribute portions of the allowance to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio. Our process involves procedures to appropriately consider the unique risk characteristics of our commercial and consumer loan portfolio segments. For each portfolio segment, impairment is measured individually for each impaired loan. Our 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 our allowance for loan losses by commercial and consumer portfolio segments:

							Three months ended March 31, 2014
	Commercial				Consumer
(dollars in thousands)	Owner  occupied  RE	Non-owner  occupied  RE	Construction	Business	Real  Estate	Home  equity		Construction	Other	Total
Balance, beginning of period	$ 1,880	2,633	397	3,329	1,091	644		99	140	10,213
Provision for loan losses	13	780	4	43	151	82		5	(78)	1,000
Loan charge-offs	-	(434)	-	-	-	(76)		-	(2)	(512)
Loan recoveries	-	-	-	11	-	1		-	-	12
Net loan charge-offs	-	(434)	-	11	-	(75)		-	(2)	(500)
Balance, end of period	$ 1,893	2,979	401	3,383	1,242	651		104	60	10,713
Net charge-offs to average loans (annualized)										0.27%
Allowance for loan losses to gross loans										1.38%
Allowance for loan losses to nonperforming loans										120.99%
							Three months ended March 31, 2013
	Commercial				Consumer
(dollars in thousands)	Owner  occupied  RE	Non-owner  occupied  RE	Construction	Business	Real  Estate	Home  equity		Construction	Other	Total
Balance, beginning of period	$  1,774	1,946	313	3,981	346	540		3	188	9,091
Provision for loan losses	524	14	80	(113)	199	274		83	61	1,125
Loan charge-offs	(386)	-	-	(515)	-	-		-	(43)	(944)
Loan recoveries	-	2	-	86	-	7		-	-	95
Net loan charge-offs	(386)	2	-	(429)	-	7		-	(43)	(849)
Balance, end of period	$ 1,916	1,962	393	3,439	545	821		86	206	9,367
Net charge-offs to average loans (annualized)										0.52%
Allowance for loan losses to gross loans										1.41%
Allowance for loan losses to nonperforming loans										148.49%

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

					March 31, 2014
	Allowance for loan losses			Recorded investment in loans
(dollars in thousands)	Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$4,065	1,006	5,071	13,634	2,756	16,390
Collectively evaluated	4,591	1,051	5,642	526,448	235,960	762,408
Total	$8,656	2,057	10,713	540,082	238,716	778,798
					December 31, 2013
	Allowance for loan losses			Recorded investment in loans
	Commercial	Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$3,833	896	4,729	14,111	2,271	16,382
Collectively evaluated	4,406	1,078	5,484	497,627	223,258	720,885
Total	$8,239	1,974	10,213	511,738	225,529	737,267