Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2017

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 $2.2 million as of June 30, 2017 and $2.0 million as of December 31, 2016.

	June 30, 2017					December 31, 2016
(dollars in thousands)	Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	310,696		23.9	%	$	285,938		24.6	%
Non-owner occupied RE		292,001		22.5	%		239,574		20.6	%
Construction		42,447		3.3	%		33,393		2.9	%
Business		212,703		16.3	%		202,552		17.4	%
Total commercial loans		857,847		66.0	%		761,457		65.5	%
Consumer
Real estate		233,401		18.0	%		215,588		18.5	%
Home equity		147,091		11.3	%		137,105		11.8	%
Construction		39,758		3.0	%		31,922		2.7	%
Other		21,732		1.7	%		17,572		1.5	%
Total consumer loans		441,982		34.0	%		402,187		34.5	%
Total gross loans, net of deferred fees		1,299,829		100.0	%		1,163,644		100.0	%
Less—allowance for loan losses		(15,444	)				(14,855	)
Total loans, net	$	1,284,385				$	1,148,789

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.

	June 30, 2017
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years		Total
Commercial
Owner occupied RE	$	27,023	163,848	119,825		310,696
Non-owner occupied RE		39,353	151,447	101,201		292,001
Construction		12,303	9,210	20,934		42,447
Business		70,721	101,246	40,736		212,703
Total commercial loans		149,400	425,751	282,696		857,847
Consumer
Real estate		26,561	54,848	151,992		233,401
Home equity		9,382	30,130	107,579		147,091
Construction		16,602	2,614	20,542		39,758
Other		7,382	9,942	4,408		21,732
Total consumer loans		59,927	97,534	284,521		441,982
Total gross loans, net of deferred fees	$	209,327	523,285	567,217		1,299,829
Loans maturing after one year with:
Fixed interest rates					$	822,399
Floating interest rates						268,103
	December 31, 2016
			After one
	One year		but within	After five
	or less		five years	years		Total
Commercial
Owner occupied RE	$	26,062	145,419	114,457		285,938
Non-owner occupied RE		34,685	142,261	62,628		239,574
Construction		5,881	9,558	17,954		33,393
Business		66,361	99,255	36,936		202,552
Total commercial loans		132,989	396,493	231,975		761,457
Consumer
Real estate		26,342	49,832	139,414		215,588
Home equity		7,142	29,041	100,922		137,105
Construction		14,103	627	17,192		31,922
Other		5,049	9,305	3,218		17,572
Total consumer		52,636	88,805	260,746		402,187
Total gross loan, net of deferred fees	$	185,625	485,298	492,721		1,163,644
Loans maturing after one year with :
Fixed interest rates					$	733,892
Floating interest rates						244,127

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
We manage 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. Our risk categories include Pass, Special Mention, Substandard, and Doubtful, each of which is defined by our 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.

						June 30, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	305,676	285,376	42,447	202,363	835,862
Special mention		2,645	3,038	-	4,546	10,229
Substandard		2,375	3,587	-	5,794	11,756
Doubtful		-	-	-	-	-
	$	310,696	292,001	42,447	212,703	857,847

	December 31, 2016
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Pass	$	282,055	234,957	33,393	193,517	743,922
Special mention		1,097	975	-	2,489	4,561
Substandard		2,786	3,642	-	6,546	12,974
Doubtful		-	-	-	-	-
	$	285,938	239,574	33,393	202,552	761,457

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

	June 30, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	310,451	291,236	42,447	211,280	855,414
30-59 days past due		-	-	-	266	266
60-89 days past due		-	-	-	-	-
Greater than 90 Days		245	765	-	1,157	2,167
	$	310,696	292,001	42,447	212,703	857,847
	December 31, 2016
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	284,700	238,346	33,393	200,624	757,063
30-59 days past due		981	-	-	1,423	2,404
60-89 days past due		257	56	-	-	313
Greater than 90 Days		-	1,172	-	505	1,677
	$	285,938	239,574	33,393	202,552	761,457

As of June 30, 2017 and December 31, 2016, loans 30 days or more past due represented 0.39% and 0.55% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.19% and 0.38% of the Company’s total loan portfolio as of June 30, 2017 and December 31, 2016, 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.

	June 30, 2017
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	229,812	143,932	39,758	21,624	435,126
Special mention		744	2,235	-	10	2,989
Substandard		2,845	924	-	98	3,867
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	233,401	147,091	39,758	21,732	441,982

	December 31, 2016
	Real estate		Home equity	Construction	Other	Total
Pass	$	211,563	134,124	31,922	17,485	395,094
Special mention		1,064	2,109	-	16	3,189
Substandard		2,961	872	-	71	3,904
Doubtful		-	-	-	-	-
Loss		-	-	-	-	-
	$	215,588	137,105	31,922	17,572	402,187

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

	June 30, 2017
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	231,602	146,328	39,758	21,718	439,406
30-59 days past due		548	566	-	14	1,128
60-89 days past due		977	-	-	-	977
Greater than 90 Days		274	197	-	-	471
	$	233,401	147,091	39,758	21,732	441,982
	December 31, 2016
	Real estate		Home equity	Construction	Other	Total
Current	$	214,228	136,638	31,922	17,427	400,215
30-59 days past due		1,041	210	-	126	1,377
60-89 days past due		282	-	-	6	288
Greater than 90 Days		37	257	-	13	307
	$	215,588	137,105	31,922	17,572	402,187

As of June 30, 2017 and December 31, 2016, consumer loans 30 days or more past due were 0.20% and 0.17% of total loans, respectively.

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)	June 30, 2017			December 31, 2016
Commercial
Owner occupied RE	$	245		276
Non-owner occupied RE		2,205		2,711
Construction		-		-
Business		1,324		686
Consumer
Real estate		534		550
Home equity		197		256
Construction		-		-
Other		4		13
Nonaccruing troubled debt restructurings		749		990
Total nonaccrual loans, including nonaccruing TDRs		5,258		5,482
Other real estate owned		428		639
Total nonperforming assets	$	5,686		6,121
Nonperforming assets as a percentage of:
Total assets		0.37	%	0.46	%
Gross loans		0.44	%	0.53	%
Total loans over 90 days past due		2,638		1,984
Loans over 90 days past due and still accruing		-		-
Accruing troubled debt restructurings	$	6,009		5,675

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.

			June 30, 2017
				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	$	2,240		2,186	833	401
Non-owner occupied RE		7,042		3,495	1,374	361
Construction		-		-	-	-
Business		4,308		3,581	3,087	1,305
Total commercial		13,590		9,262	5,294	2,067
Consumer
Real estate		1,650		1,629	1,629	1,026
Home equity		203		197	197	135
Construction		-		-	-	-
Other		180		179	179	28
Total consumer		2,033		2,005	2,005	1,189
Total	$	15,623		11,267	7,299	3,256

			December 31, 2016
				Recorded investment
					Impaired loans
	Unpaid				with related	Related
	Principal			Impaired	allowance for	allowance for
	Balance			loans	loan losses	loan losses
Commercial
Owner occupied RE	$	2,284		2,243	2,224	263
Non-owner occupied RE		7,238		4,031	1,638	457
Construction		-		-	-	-
Business		3,699		2,593	1,610	1,154
Total commercial		13,221		8,867	5,472	1,874
Consumer
Real estate		1,853		1,843	1,843	682
Home equity		207		257	-	-
Construction		-		-	-	-
Other		261		190	177	88
Total consumer		2,321		2,290	2,020	770
Total	$	15,542		11,157	7,492	2,644

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
	June 30, 2017			June 30, 2016
	Average		Recognized	Average	Recognized
	recorded		interest	recorded	interest
(dollars in thousands)	investment		income	investment	income
Commercial
Owner occupied RE	$	2,195	26	1,994	21
Non-owner occupied RE		3,620	48	5,582	35
Construction		-	-	-	-
Business		3,623	54	5,272	54
Total commercial		9,438	128	12,848	110
Consumer
Real estate		1,635	16	1,153	12
Home equity		197	1	257	1
Construction		-	-	-	-
Other		180	1	294	5
Total consumer		2,012	18	1,704	18
Total	$	11,450	146	14,552	128

	Six months ended			Six months ended		Year ended
	June 30, 2017			June 30, 2016		December 31, 2016
	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	$	2,204	53	1,999	43	2,263	112
Non-owner occupied RE		3,721	76	5,642	86	4,106	200
Construction		-	-	-	-	-	-
Business		3,635	98	5,315	134	2,873	135
Total commercial		9,560	227	12,956	263	9,242	447
Consumer
Real estate		1,642	33	1,155	21	1,854	81
Home equity		198	2	257	1	257	2
Construction		-	-	-	-	-	-
Other		181	2	295	6	203	6
Total consumer		2,021	37	1,707	28	2,314	89
Total	$	11,581	264	14,663	291	11,556	536

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 June 30, 2017
	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	$	3,052		2,967		334	3,823		2,830		1,619		289	373		15,287
Provision for loan losses		(88	)	255		16	139		240		(23	)	39	(78	)	500
Loan charge-offs		-		(253	)	-	(120	)	-		-		-	-		(373	)
Loan recoveries		-		12		-	15		(9	)	12		-	-		30
Net loan charge-offs		-		(241	)	-	(105	)	(9	)	12		-	-		(343	)
Balance, end of period	$	2,964		2,981		350	3,857		3,061		1,608		328	295		15,444
Net charge-offs to average loans (annualized)																0.11	%
Allowance for loan losses to gross loans																1.19	%
Allowance for loan losses to nonperforming loans																293.75	%

	Three months ended June 30, 2016
	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	$	2,493		3,236		442		3,639		2,131		1,263		351		343		13,898
Provision for loan losses		304		(250	)	(49	)	488		170		40		(139	)	11		575
Loan charge-offs		-		-		(42	)	(311	)	-		(7	)	-		(24	)	(384	)
Loan recoveries		-		25		-		203		-		-		-		-		228
Net loan charge-offs		-		25		(42	)	(108	)	-		(7	)	-		(24	)	(156	)
Balance, end of period	$	2,797		3,011		351		4,019		2,301		1,296		212		330		14,317
Net charge-offs to average loans (annualized)																		0.06	%
Allowance for loan losses to gross loans																		1.34	%
Allowance for loan losses to nonperforming loans																		250.63	%
	Six months ended June 30, 2017
	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	$	2,843		2,778		295		4,123		2,780		1,475		252		309		14,855
Provision for loan losses		121		623		55		(182	)	200		121		76		(14	)	1,000
Loan charge-offs		-		(433	)	-		(130	)	-		-		-		-		(563	)
Loan recoveries		-		13		-		46		81		12		-		-		152
Net loan charge-offs		-		(420	)	-		(84	)	81		12		-		-		(411	)
Balance, end of period	$	2,964		2,981		350		3,857		3,061		1,608		328		295		15,444
Net charge-offs to average loans (annualized)																		0.03	%
	Six months ended June 30, 2016
	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	$	2,347		3,187		338		3,800		2,070		1,202		313		372		13,629
Provision for loan losses		455		(128	)	55		330		418		101		(101	)	70		1,200
Loan charge-offs		(5	)	(75	)	(42	)	(348	)	(187	)	(7	)	-		(115	)	(779	)
Loan recoveries		-		27		-		237		-		-		-		3		267
Net loan charge-offs		(5	)	(48	)	(42	)	(111	)	(187	)	(7	)	-		(112	)	(512	)
Balance, end of period	$	2,797		3,011		351		4,019		2,301		1,296		212		330		14,317
Net charge-offs to average loans (annualized)																		0.10	%

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

	June 30, 2017
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	2,067	1,189	3,256	9,262	2,005	11,267
Collectively evaluated		8,085	4,103	12,188	848,585	439,977	1,288,562
Total	$	10,152	5,292	15,444	857,847	441,982	1,299,829
	December 31, 2016
	Allowance for loan losses				Recorded investment in loans
	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,874	770	2,644	8,867	2,290	11,157
Collectively evaluated		8,165	4,046	12,211	752,590	399,897	1,152,487
Total	$	10,039	4,816	14,855	761,457	402,187	1,163,644