Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2015

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 $1.9 million and $1.8 million as of June 30, 2015 and December 31, 2014, respectively.

		June 30, 2015					December 31, 2014
(dollars in thousands)		Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE		$	232,997		24.2%		$	191,061		21.9%
Non-owner occupied RE			207,623		21.6%			183,440		21.1%
Construction			33,570		3.5%			50,995		5.8%
Business			162,017		16.8%			149,986		17.2%
Total commercial loans			636,207		66.1%			575,482		66.0%
Consumer
Real estate			166,404		17.3%			146,859		16.9%
Home equity			105,241		10.9%			95,629		11.0%
Construction			40,957		4.2%			39,226		4.5%
Other			14,687		1.5%			14,250		1.6%
Total consumer loans			327,289		33.9%			295,964		34.0%
Total gross loans, net of deferred fees			963,496		100.0%			871,446		100.0%
Less—allowance for loan losses			(12,927	)				(11,752	)
Total loans, net	$	950,569				$	859,694

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.

1,335

	June 30, 2015
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years		Total
Commercial
Owner occupied RE	$	22,954	125,545	84,498		232,997
Non-owner occupied RE		38,321	132,549	36,753		207,623
Construction		13,429	15,467	4,674		33,570
Business		72,776	76,802	12,439		162,017
Total commercial loans		147,480	350,363	138,364		636,207
Consumer
Real estate		25,794	42,669	97,941		166,404
Home equity		6,151	31,292	67,798		105,241
Construction		17,578	2,623	20,756		40,957
Other		7,409	5,787	1,491		14,687
Total consumer loans		56,932	82,371	187,986		327,289
Total gross loans, net of deferred fees	$	204,412	432,734	326,350		963,496
Loans maturing after one year with:
Fixed interest rates					$	560,046
Floating interest rates						199,038
	December 31, 2014
			After one
	One year		but within	After five
	or less		five years	years		Total
Commercial
Owner occupied RE	$	20,737	98,110	72,214		191,061
Non-owner occupied RE		46,718	104,402	32,320		183,440
Construction		11,923	25,145	13,927		50,995
Business		75,718	65,899	8,369		149,986
Total commercial loans		155,096	293,556	126,830		575,482
Consumer
Real estate		21,571	41,549	83,739		146,859
Home equity		5,645	28,394	61,590		95,629
Construction		13,531	2,073	23,622		39,226
Other		7,278	5,637		14,250
Total consumer		48,025	77,653	170,286		295,964
Total gross loan, net of deferred fees	$	203,121	371,209	297,116		871,446
Loans maturing after one year with :
Fixed interest rates						494,058
Floating interest rates						174,267

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 loan class. 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.

609,850

	June 30, 2015
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	227,441	197,847	31,639	152,923
Special mention		3,774	3,326	-	4,935	12,035
Substandard		1,782	6,450	1,931	4,159	14,322
Doubtful		-	-	-	-	-
	$	232,997	207,623	33,570	162,017	636,207

     Owner     Non-owner               

	December 31, 2014
	occupied RE		occupied RE	Construction	Business	Total
Pass	$	184,158	173,711	48,140	140,432	546,441
Special mention		5,035	3,376	129	4,715	13,255
Substandard		1,868	6,353	2,726	4,839	15,786
Doubtful		-	-	-	-	-
	$	191,061	183,440	50,995	149,986	575,482

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

	June 30, 2015
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	232,277	202,967	33,038	160,363	628,645
30-59 days past due		-	1,452	-	252	1,704
60-89 days past due		-	-	-	14	14
Greater than 90 Days		720	3,204	532	1,388	5,844
	$	232,997	207,623	33,570	162,017	636,207
	December 31, 2014
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	190,801	180,577	50,212	148,317	569,907
30-59 days past due		-	49	-	35	84
60-89 days past due		-	246	-	155	401
Greater than 90 Days		260	2,568	783	1,479	5,090
	$	191,061	183,440	50,995	149,986	575,482

As of June 30, 2015 and December 31, 2014, loans 30 days or more past due represented 0.97% and 0.73% of our total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.78% and 0.64% of our total loan portfolio as of June 30, 2015 and December 31, 2014, 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, and 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.

7901,055

	June 30, 2015
(dollars in thousands)	Real estate			Home equity		Construction		Other		Total
Pass	$	163,612		101,210		40,957		14,523		320,302
Special mention			2,976		-		135		3,901
Substandard		2,002			-		29		3,086
Doubtful		-		-		-		-		-
	$	166,404		105,241		40,957		14,687		327,289

	December 31, 2014
	Real estate		Home equity	Construction	Other	Total
Pass	$	144,070	91,084	39,226	14,013	288,393
Special mention		953	3,268	-	139	4,360
Substandard		1,836	1,277	-	98	3,211
Doubtful		-	-	-	-	-
	$	146,859	95,629	39,226	14,250	295,964

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

	June 30, 2015
(dollars in thousands)	Real estate		Home equity	Construction	Other		Total
Current	$	165,065	104,846	40,957	14,632	325,500
30-59 days past due		455	145	-	51		651
60-89 days past due		465	130	-	4		599
Greater than 90 Days		419	120	-	-		539
	$	166,404	105,241	40,957	14,687		327,289
	December 31, 2014
	Real estate		Home equity	Construction	Other		Total
Current	$	146,362	95,311	39,226	14,247		294,146
30-59 days past due		40	-	-	-		40
60-89 days past due		-	130	-	3		133
Greater than 90 Days		457	188	-	-		645
	$	146,859	95,629	39,226	14,250		295,964

As of June 30, 2015 and December 31, 2014, consumer loans 30 days or more past due were 0.19% and 0.09%, 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)	June 30, 2015		December 31, 2014
Commercial
Owner occupied RE	$	720	322
Non-owner occupied RE		3,018	2,344
Construction		-	783
Business		1,178	1,408
Consumer
Real estate		419	457
Home equity		250	188
Construction		-	-
Other		1	1
Nonaccruing troubled debt restructurings		1,087	1,147
Total nonaccrual loans, including nonaccruing TDRs		6,673	6,650
Other real estate owned		2,887	3,307
Total nonperforming assets	$	9,560	9,957
Nonperforming assets as a percentage of:
Total assets		0.85%	0.97%
Gross loans		0.99%	1.14%
Total loans over 90 days past due		6,383	5,735
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	8,173	8,562

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.

(dollars in thousands)Balanceloansloan lossesloan losses

			June 30, 2015
			Recorded investment
				Impaired loans
	Unpaid			with related	Related
	Principal		Impaired	allowance for	allowance for
Commercial
Owner occupied RE	$	1,531	1,506	1,506	490
Non-owner occupied RE		8,342	4,997	3,091	778
Construction		1,931	1,931	532	166
Business		4,591	4,126	2,946	2,266
Total commercial		16,395	12,560	8,075	3,700
Consumer
Real estate		1,702	1,664	1,346	631
Home equity		406	406	157	157
Construction		-	-	-	-
Other		216	216	216	216
Total consumer		2,324	2,286	1,719	1,004
Total	$	18,719	14,846	9,794	4,704

			December 31, 2014
			Recorded investment
				Impaired loans
	Unpaid			with related	Related
	Principal		Impaired	allowance for	allowance for
	Balance		loans	loan losses	loan losses
Commercial
Owner occupied RE	$	1,122	1,122	1,060	371
Non-owner occupied RE		5,813	4,522	2,777	801
Construction		5,268	2,726	1,315	324
Business		5,385	4,565	3,528	2,464
Total commercial		17,588	12,935	8,680	3,960
Consumer
Real estate		1,620	1,620	1,299	585
Home equity		347	347	347	191
Construction		-	-	-	-
Other		310	310	310	310
Total consumer		2,277	2,277	1,956	1,086
Total	$	19,865	15,212	10,636	5,046

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.

       Other21922773

	Three months ended			Three months ended
	June 30, 2015			June 30, 2014
		Average	Recognized	Average	Average
	recorded		interest	recorded	recorded
(dollars in thousands)	investment		ncome	investment	investment
Commercial
Owner occupied RE	$	1,292	10	1,662	2
Non-owner occupied RE		5,153	24	6,646	22
Construction		1,935	23	1,768	-
Business		4,194	33	4,713	42
Total commercial		12,574	90	14,789	66
Consumer
Real estate		1,685	12	2,355	12
Home equity		376	8	161	2
Construction		-	-	-	-
Total consumer		2,280	22	2,793	17
Total	$	14,854	112	17,582	83

	Six months ended			Six months ended		Year ended
	June 30, 2015			June 30, 2014		December 31, 2014
	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	$	1,236	31	1,753	3	1,568		47
Non-owner occupied RE		4,942	47	6,305	53	5,693		104
Construction		2,198	41	1,802	14	1,977		75
Business		4,318	70	4,703	83	4,522		154
Total commercial		12,694	189	14,563	153	13,760		380
Consumer
Real estate		1,664	24	2,172	25	2,094		53
Home equity		366	9	187	4	251		10
Construction		-	-	-	-	-		-
Other		249	4	260	5	282		13
Total consumer		2,279	37	2,619	34	2,627	76
Total	$	14,973	226	17,182	187	16,387		456

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:

	Six months ended June 30, 2015
	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	$	1,645		2,332		614		3,625		1,714		1,162		236	424		11,752
Provision for loan losses		643		574		(216	)	272		263		131		36	(78	)	1,625
Loan charge-offs		(24	)	(204	)	-		(218	)	(39	)	(13	)	-	(1	)	(499	)
Loan recoveries		-		6		-		42		-		1		-	-		49
Net loan charge-offs		(24	)	(198	)	-		(176	)	(39	)	(12	)	-	(1	)	(450	)
Balance, end of period	$	2,264		2,708		398		3,721		1,938		1,281		272	345		12,927
Net charge-offs to average loans (annualized)																	0.10%
Allowance for loan losses to gross loans																	1.34%
Allowance for loan losses to nonperforming loans																	193.73%

	Six months ended June 30, 2014
	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	$	1,880		2,633		397	3,329	1,091	644		99	140		10,213
Provision for loan losses		(299	)	1,661		29	207	178	100		36	38		1,950
Loan charge-offs		-		(1,084	)	-	-	-	(76	)	-	(4	)	(1,164	)
Loan recoveries		-		-		-	103	-	1		-	-		104
Net loan charge-offs		-		(1,084	)	-	103	-	(75	)	-	(4	)	(1,060	)
Balance, end of period	$	1,581		3,210		426	3,639	1,269	669		135	174		11,103
Net charge-offs to average loans (annualized)														0.28%
Allowance for loan losses to gross loans														1.37%
Allowance for loan losses to nonperforming loans														90.30%

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

	June 30, 2015
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	3,700	1,004	4,704	12,560	2,286	14,846
Collectively evaluated		5,391	2,832	8,223	623,647	325,003	948,650
Total	$	9,091	3,836	12,927	636,207	327,289	963,496
	December 31, 2014
	Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	3,960	1,086	5,046	12,935	2,277	15,212
Collectively evaluated		4,256	2,450	6,706	562,547	293,687	856,234
Total	$	8,216	3,536	11,752	575,482	295,964	871,446