Loans and Allowance for Loan Losses

3 Months Ended

Mar. 31, 2016

Loans and Allowance for Loan Losses [Abstract]

Loans and Allowance for Loan Losses

NOTE 3 – 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 $1.7 million as of March 31, 2016 and December 31, 2015.

	March 31, 2016				December 31, 2015
(dollars in thousands)	Amount			% of Total		Amount		% of Total
Commercial
Owner occupied RE	$	233,753		22.5%	$	236,083		23.5%
Non-owner occupied RE		221,264		21.3%		205,604		20.5%
Construction		43,843		4.2%		41,751		4.1%
Business		180,281		17.4%		171,743		17.1%
Total commercial loans		679,141		65.4%		655,181		65.2%
Consumer
Real estate		175,954		16.9%		174,802		17.4%
Home equity		118,888		11.4%		116,563		11.6%
Construction		48,349		4.7%		43,318		4.3%
Other		16,530		1.6%		15,080		1.5%
Total consumer loans		359,721		34.6%		349,763		34.8%
Total gross loans, net of deferred fees		1,038,862		100.0%		1,004,944		100.0%
Less—allowance for loan losses		(13,898	)			(13,629	)
Total loans, net	$	1,024,964			$	991,315

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, 2016
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	22,287	115,323	96,143		233,753
Non-owner occupied RE		35,109	127,437	58,718		221,264
Construction		5,068	26,986	11,789		43,843
Business		63,113	90,734	26,434		180,281
Total commercial loans		125,577	360,480	193,084		679,141
Consumer
Real estate		29,212	38,798	107,944		175,954
Home equity		6,617	29,797	82,474		118,888
Construction		15,226	2,067	31,056		48,349
Other		7,170	7,010	2,350		16,530
Total consumer loans		58,225	77,672	223,824		359,721
Total gross loans, net of deferred fees	$	183,802	438,152	416,908		1,038,862
Loans maturing after one year with:
Fixed interest rates					$	639,180
Floating interest rates						215,880

	December 31, 2015
			After one
	One year		but within	After five
	or less		five years	years	Total
Commercial
Owner occupied RE	$	16,836	126,156	93,091		236,083
Non-owner occupied RE		40,690	111,087	53,827		205,604
Construction		9,183	23,206	9,362		41,751
Business		64,099	83,435	24,209		171,743
Total commercial loans		130,808	343,884	180,489		655,181
Consumer
Real estate		28,348	35,509	110,945		174,802
Home equity		5,105	31,326	80,132		116,563
Construction		14,095	1,445	27,778		43,318
Other		6,430	6,270	2,380		15,080
Total consumer		53,978	74,550	221,235		349,763
Total gross loan, net of deferred fees	$	184,786	418,434	401,724		1,004,944
Loans maturing after one year with:
Fixed interest rates					$	612,251
Floating interest rates						207,907

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
The Company manages 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. The Company’s 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 the Company’s allowance for credit losses.

The Company categorizes its 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, 2016
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	230,892	214,183	42,076	171,263	658,414
Special mention		1,675	1,362	-	5,129	8,166
Substandard		1,186	5,719	1,767	3,889	12,561
Doubtful		-	-	-	-	-
	$	233,753	221,264	43,843	180,281	679,141
	December 31, 2015
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Pass	$	230,460	198,144	39,678	161,920	630,202
Special mention		3,887	1,574	286	5,511	11,258
Substandard		1,736	5,886	1,787	4,312	13,721
Doubtful		-	-	-	-	-
	$	236,083	205,604	41,751	171,743	655,181

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

	March 31, 2016
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	233,726	217,095	43,461	179,209	673,491
30-59 days past due		27	52	-	245	324
60-89 days past due		-	1,430	-	-	1,430
Greater than 90 Days		-	2,687	382	827	3,896
	$	233,753	221,264	43,843	180,281	679,141
	December 31, 2015
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	235,795	201,381	41,354	170,644	649,174
30-59 days past due		-	-	-	205	205
60-89 days past due		43	1,452	-	18	1,513
Greater than 90 Days		245	2,771	397	876	4,289
	$	236,083	205,604	41,751	171,743	655,181

As of March 31, 2016 and December 31, 2015, loans 30 days or more past due represented 0.60% and 0.66% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.54% and 0.60% of the Company’s total loan portfolio as of March 31, 2016 and December 31, 2015, respectively.

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, 2016
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	173,624	115,370	47,354	16,169	352,517
Special mention		1,084	2,703	-	296	4,083
Substandard		1,246	815	995	65	3,121
Doubtful		-	-	-	-	-
	$	175,954	118,888	48,349	16,530	359,721
	December 31, 2015
	Real estate		Home equity	Construction	Other	Total
Pass	$	172,589	112,080	42,319	14,967	341,955
Special mention		961	3,388	-	45	4,394
Substandard		1,252	1,095	999	68	3,414
Doubtful		-	-	-	-	-
	$	174,802	116,563	43,318	15,080	349,763

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

	March 31, 2016
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	175,613	118,631	48,349	16,522	359,115
30-59 days past due		341	-	-	8	349
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	257	-	-	257
	$	175,954	118,888	48,349	16,530	359,721
	December 31, 2015
	Real estate		Home equity	Construction	Other	Total
Current	$	174,576	116,305	43,258	14,994	349,133
30-59 days past due		187	-	60	86	333
60-89 days past due		39	-	-	-	39
Greater than 90 Days		-	258	-	-	258
	$	174,802	116,563	43,318	15,080	349,763

As of March 31, 2016 and December 31, 2015, consumer loans 30 days or more past due were 0.06% 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 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, 2016		December 31, 2015
Commercial
Owner occupied RE	$	455	704
Non-owner occupied RE		4,066	4,170
Construction		-	-
Business		736	779
Consumer
Real estate		-	-
Home equity		257	258
Construction		-	-
Other		-	5
Nonaccruing troubled debt restructurings		675	701
Total nonaccrual loans, including nonaccruing TDRs		6,189	6,617
Other real estate owned		2,284	2,475
Total nonperforming assets	$	8,473	9,092
Nonperforming assets as a percentage of:
Total assets		0.68%	0.75%
Gross loans		0.82%	0.90%
Total loans over 90 days past due	$	4,153	4,547
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	6,122	7,266

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, 2016
			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	$	635	612	158	95
Non-owner occupied RE		9,124	5,671	2,530	861
Construction		1,850	1,768	382	32
Business		3,425	2,692	1,621	1,288
Total commercial		15,034	10,743	4,691	2,276
Consumer
Real estate		1,118	1,118	802	456
Home equity		260	257	194	185
Construction		-	-	-	-
Other		193	193	-	-
Total consumer		1,571	1,568	996	641
Total	$	16,605	12,311	5,687	2,917

			December 31, 2015
			Recorded investment
				Impaired loans
	Unpaid			with related	Related
	Principal		Impaired	allowance for	allowance for
	Balance		loans	loan losses	loan losses
Commercial
Owner occupied RE	$	964	863	863	260
Non-owner occupied RE		9,144	5,792	4,161	1,321
Construction		1,855	1,787	397	31
Business		4,756	3,861	2,936	1,932
Total commercial		16,719	12,303	8,357	3,544
Consumer
Real estate		1,121	1,121	805	489
Home equity		260	258	-	-
Construction		-	-	-	-
Other		201	201	201	191
Total consumer		1,582	1,580	1,006	680
Total	$	18,301	13,883	9,363	4,224

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, 2016			March 31, 2015		December 31, 2015
	Average		Recognized	Average	Recognized	Average		Average
	recorded		interest	recorded	interest	recorded		recorded
(dollars in thousands)	investment		income	investment	income	investment		investment
Commercial
Owner occupied RE	$	615	7	1,101	22	$	884	6
Non-owner occupied RE		5,731	48	4,915	22		6,137	128
Construction		1,778	30	2,332	18		1,888	74
Business		2,760	30	4,413	36		4,067	148
Total commercial		10,884	115	12,761	98		12,976	356
Consumer
Real estate		1,119	9	1,663	11		1,112	46
Home equity		195	2	346	2		252	7
Construction		-	-	-	-		-	-
Other		257	-	266	2		208	7
Total consumer		1,571	11	2,275	15		1,572	60
Total	$	12,455	126	15,036	113		14,548	416

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, 2016
		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		$	2,347		3,187		338		3,800			2,070		1,202	313	372		13,629
Provision for loan losses			151		122		104		(158	)		248		61	38	59		625
Loan charge-offs			(5	)	(75	)	-		(36	)		(187	)	-	-	(91	)	(394	)
Loan recoveries			-		2		-		33			-		-	-	3		38
Net loan charge-offs			(5	)	(73	)	-		(3	)		(187	)	-	-	(88	)	(356	)
Balance, end of period		$	2,493		3,236		442		3,639			2,131		1,263	351	343		13,898
Net charge-offs to average loans (annualized)																		0.14%
Allowance for loan losses to gross loans																		1.34%
Allowance for loan losses to nonperforming loans																		224.56%
	Three months ended March 31, 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			259		295		(149	)	183			109		-	15	(87	)	625
Loan charge-offs			-		(78	)	-		(66	)		-		-	-	(1	)	(145	)
Loan recoveries			-		2		-		7			-		-	-	-		9
Net loan charge-offs			-		(76	)	-		(59	)		-		-	-	(1	)	(136	)
Balance, end of period		$	1,904		2,551		465		3,749			1,823		1,162	251	336		12,241
Net charge-offs to average loans (annualized)																		0.06%
Allowance for loan losses to gross loans																		1.35%
Allowance for loan losses to nonperforming loans																		187.61%

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

	March 31, 2016
	Allowance for loan losses					Recorded investment in loans
(dollars in thousands)		Commercial		Consumer	Total		Commercial	Consumer	Total
Individually evaluated		$	2,276	641	2,917		10,743	1,568	12,311
Collectively evaluated			7,535	3,446	10,981		668,398	358,153	1,026,551
Total		$	9,811	4,087	13,898		679,141	359,721	1,038,862
	December 31, 2015
	Allowance for loan losses					Recorded investment in loans
		Commercial		Consumer	Total		Commercial	Consumer	Total
Individually evaluated		$	3,544	680	4,224		12,303	1,580	13,883
Collectively evaluated			6,128	3,277	9,405		642,878	348,183	991,061
Total		$	9,672	3,957	13,629		655,181	349,763	1,004,944