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 $2.5 million as of March 31, 2018 and $2.3 million as of December 31, 2017.


	March 31, 2018					December 31, 2017
(dollars in thousands)	Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	339,444		23.3	%	$	316,818		22.8	%
Non-owner occupied RE		339,231		23.2	%		312,798		22.6	%
Construction		56,210		3.8	%		51,179		3.7	%
Business		234,820		16.1	%		226,158		16.3	%
Total commercial loans		969,705		66.4	%		906,953		65.4	%
Consumer
Real estate		275,731		18.9	%		273,050		19.7	%
Home equity		155,507		10.7	%		156,141		11.3	%
Construction		35,017		2.4	%		28,351		2.0	%
Other		23,422		1.6	%		22,575		1.6	%
Total consumer loans		489,677		33.6	%		480,117		34.6	%
Total gross loans, net of deferred fees		1,459,382		100.0	%		1,387,070		100.0	%
Less—allowance for loan losses		(15,852	)				(15,523	)
Total loans, net	$	1,443,530				$	1,371,547

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, 2018
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	23,682	177,441	138,321		339,444
Non-owner occupied RE		39,636	178,214	121,381		339,231
Construction		13,785	20,700	21,725		56,210
Business		67,252	119,869	47,699		234,820
Total commercial loans		144,355	496,224	329,126		969,705
Consumer
Real estate		30,218	62,393	183,120		275,731
Home equity		11,775	27,386	116,346		155,507
Construction		19,720	868	14,429		35,017
Other		7,941	10,660	4,821		23,422
Total consumer loans		69,654	101,307	318,716		489,677
Total gross loans, net of deferred fees	$	214,009	597,531	647,842		1,459,382
Loans maturing after one year with:
Fixed interest rates					$	942,192
Floating interest rates						303,181

	December 31, 2017
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	24,171	167,425	125,222		316,818
Non-owner occupied RE		39,519	165,764	107,515		312,798
Construction		13,086	12,796	25,297		51,179
Business		73,588	107,584	44,986		226,158
Total commercial loans		150,364	453,569	303,020		906,953
Consumer
Real estate		30,172	61,809	181,069		273,050
Home equity		13,331	25,807	117,003		156,141
Construction		14,943	1,737	11,671		28,351
Other		7,203	11,371	4,001		22,575
Total consumer		65,649	100,724	313,744		480,117
Total gross loan, net of deferred fees	$	216,013	554,293	616,764		1,387,070
Loans maturing after one year with :
Fixed interest rates					$	875,991
Floating interest rates						295,066

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 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, 2018
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	335,912	335,321	56,210	227,672	955,115
Special mention		540	53	-	3,878	4,471
Substandard		2,992	3,857	-	3,270	10,119
Doubtful		-	-	-	-	-
	$	339,444	339,231	56,210	234,820	969,705


	December 31, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	312,628	306,965	51,179	215,729	886,501
Special mention		1,770	2,082	-	5,540	9,392
Substandard		2,420	3,751	-	4,889	11,060
Doubtful		-	-	-	-	-
	$	316,818	312,798	51,179	226,158	906,953

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


	March 31, 2018
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	338,915	339,038	56,210	234,386	968,549
30-59 days past due		529	-	-	332	861
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	193	-	102	295
	$	339,444	339,231	56,210	234,820	969,705

					December 31, 2017
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	316,818	312,477	51,179	224,861	905,335
30-59 days past due		-	129	-	416	545
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	192	-	881	1,073
	$	316,818	312,798	51,179	226,158	906,953

As of March 31, 2018 and December 31, 2017, loans 30 days or more past due represented 0.30% and 0.34% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.08% and 0.12% of the Company’s total loan portfolio as of March 31, 2018 and December 31, 2017, 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, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	271,915	151,586	35,017	23,172	481,690
Special mention		440	619	-	184	1,243
Substandard		3,376	3,302	-	66	6,744
Doubtful		-	-	-	-	-
	$	275,731	155,507	35,017	23,422	489,677


	December 31, 2017
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	269,422	152,545	28,351	22,367	472,685
Special mention		715	1,025	-	88	1,828
Substandard		2,913	2,571	-	120	5,604
Doubtful		-	-	-	-	-
	$	273,050	156,141	28,351	22,575	480,117

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


	March 31, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	274,302	153,827	35,017	23,317	486,463
30-59 days past due		1,304	829	-	105	2,238
60-89 days past due		125	-	-	-	125
Greater than 90 Days		-	851	-	-	851
	$	275,731	155,507	35,017	23,422	489,677

					December 31, 2017
(dollars in thousands)		Real estate	Home equity	Construction	Other	Total
Current	$	271,284	154,821	28,351	22,506	476,962
30-59 days past due		681	325	-	69	1,075
60-89 days past due		131	995	-	-	1,126
Greater than 90 Days		954	-	-	-	954
	$	273,050	156,141	28,351	22,575	480,117

As of March 31, 2018 and December 31, 2017, consumer loans 30 days or more past due were 0.22% and 0.23% 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)	March 31, 2018		December 31, 2017
Commercial
Owner occupied RE	$	-	-
Non-owner occupied RE		1,525	1,581
Construction		-	-
Business		102	910
Consumer
Real estate		1,091	992
Home equity		1,730	1,144
Construction		-	-
Other		-	1
Nonaccruing troubled debt restructurings		2,826	2,673
Total nonaccrual loans, including nonaccruing TDRs		7,274	7,301
Other real estate owned		242	242
Total nonperforming assets	$	7,516	7,543
Nonperforming assets as a percentage of:
Total assets		0.43%	0.46%
Gross loans		0.52%	0.54%
Total loans over 90 days past due		1,146	2,027
Loans over 90 days past due and still accruing		-	-
Accruing troubled debt restructurings	$	5,648	5,145

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, 2018
			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	$	2,276	2,227	1,798	180
Non-owner occupied RE		6,893	3,717	2,119	729
Construction		-	-	-	-
Business		2,580	1,863	1,863	943
Total commercial		11,749	7,807	5,780	1,852
Consumer
Real estate		2,846	2,795	2,128	1,285
Home equity		2,751	2,154	1,275	566
Construction		-	-	-	-
Other		166	166	166	20
Total consumer		5,763	5,115	3,569	1,871
Total	$	17,512	12,922	9,349	3,723


				December 31, 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	$	2,281	2,235	464	179
Non-owner occupied RE		6,827	3,665	2,646	750
Construction		-	-	-	-
Business		3,735	2,764	1,993	1,061
Total commercial		12,843	8,664	5,103	1,990
Consumer
Real estate		2,062	2,037	2,037	1,379
Home equity		2,010	1,575	680	286
Construction		-	-	-	-
Other		171	170	170	22
Total consumer		4,243	3,782	2,887	1,687
Total	$	17,086	12,446	7,990	3,677

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, 2018			March 31, 2017		December 31, 2017
	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	$	2,231	17	2,232	28	2,255	104
Non-owner occupied RE		3,758	50	3,927	29	4,144	199
Construction		-	-	-	-	-	-
Business		1,886	21	3,675	40	2,823	162
Total commercial		7,875	88	9,834	97	9,222	465
Consumer
Real estate		2,814	41	1,836	16	2,047	69
Home equity		2,203	28	256	1	1,576	97
Construction		-	-	-	-	-	-
Other		168	1	182	-	174	6
Total consumer		5,185	70	2,274	17	3,797	172
Total	$	13,060	158	12,108	114	13,019	637

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, 2018
	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	$	2,534	3,230		325	3,848		3,495		1,600		210	281		15,523
Provision for loan losses		146	135		90	(294	)	(105	)	451		46	31		500
Loan charge-offs		-	-		-	(119	)	-		(140	)	-	(34	)	(293	)
Loan recoveries		-	1		-	118		1		-		-	2		122
Net loan charge-offs		-	1		-	(1	)	1		(140	)	-	(32	)	(171	)
Balance, end of period	$	2,680	3,366		415	3,553		3,391		1,911		256	280		15,852
Net charge-offs to average loans (annualized)															0.05	%
Allowance for loan losses to gross loans															1.09	%
Allowance for loan losses to nonperforming loans															217.92	%

	Three months ended March 31, 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	$	2,843	2,778		295	4,123		2,780		1,475		252	309		14,855
Provision for loan losses		209	369		39	(321	)	(40	)	143		37	64		500
Loan charge-offs		-	(181	)	-	(9	)	-		-		-	-		(190	)
Loan recoveries		-	1		-	30		90		1		-	-		122
Net loan charge-offs		-	(180	)	-	21		90		1		-	-		(68	)
Balance, end of period	$	3,052	2,967		334	3,823		2,830		1,619		289	373		15,287
Net charge-offs to average loans (annualized)															0.02	%
Allowance for loan losses to gross loans															1.25	%
Allowance for loan losses to nonperforming loans															247.43	%

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


	March 31, 2018
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,852	1,871	3,723	7,807	5,115	12,922
Collectively evaluated		8,162	3,967	12,129	961,898	484,562	1,446,460
Total	$	10,014	5,838	15,852	969,705	489,677	1,459,382

	December 31, 2017
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,990	1,687	3,677	8,664	3,782	12,446
Collectively evaluated		7,947	3,899	11,846	898,289	476,335	1,374,624
Total	$	9,937	5,586	15,523	906,953	480,117	1,387,070