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 $3.1 million as of September 30, 2019 and $2.8 million as of December 31, 2018.


	September 30, 2019					December 31, 2018
(dollars in thousands)	Amount			% of Total		Amount			% of Total
Commercial
Owner occupied RE	$	392,896		21.4	%	$	367,018		21.9	%
Non-owner occupied RE		481,865		26.2	%		404,296		24.1	%
Construction		75,710		4.1	%		84,411		5.0	%
Business		290,154		15.8	%		272,980		16.3	%
Total commercial loans		1,240,625		67.5	%		1,128,705		67.3	%
Consumer
Real estate		346,512		18.8	%		320,943		19.1	%
Home equity		174,611		9.5	%		165,937		9.9	%
Construction		49,548		2.7	%		37,925		2.3	%
Other		27,131		1.5	%		23,822		1.4	%
Total consumer loans		597,802		32.5	%		548,627		32.7	%
Total gross loans, net of deferred fees		1,838,427		100.0	%		1,677,332		100.0	%
Less—allowance for loan losses		(15,848	)				(15,762	)
Total loans, net	$	1,822,579				$	1,661,570

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.


	September 30, 2019
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	37,933	148,367	206,596		392,896
Non-owner occupied RE		58,945	263,046	159,874		481,865
Construction		29,096	22,696	23,918		75,710
Business		74,851	143,215	72,088		290,154
Total commercial loans		200,825	577,324	462,476		1,240,625
Consumer
Real estate		25,426	81,161	239,925		346,512
Home equity		12,154	28,425	134,032		174,611
Construction		14,249	1,057	34,242		49,548
Other		6,381	16,455	4,295		27,131
Total consumer loans		58,210	127,098	412,494		597,802
Total gross loans, net of deferred fees	$	259,035	704,422	874,970		1,838,427
Loans maturing after one year with:
Fixed interest rates					$	1,214,368
Floating interest rates						365,024


	December 31, 2018
			After one
	One year		but within	After five
(dollars in thousands)	or less		five years	years	Total
Commercial
Owner occupied RE	$	20,839	165,436	180,743		367,018
Non-owner occupied RE		43,000	227,454	133,842		404,296
Construction		22,941	33,045	28,425		84,411
Business		80,672	128,911	63,397		272,980
Total commercial loans		167,452	554,846	406,407		1,128,705
Consumer
Real estate		29,301	70,467	221,175		320,943
Home equity		8,867	24,618	132,452		165,937
Construction		16,006	1,646	20,273		37,925
Other		7,681	11,253	4,888		23,822
Total consumer		61,855	107,984	378,788		548,627
Total gross loan, net of deferred fees	$	229,307	662,830	785,195		1,677,332
Loans maturing after one year with:
Fixed interest rates					$	1,100,854
Floating interest rates						347,171

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 loan 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 credit risk; however, still have 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.


	September 30, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	389,869	472,762	75,710	283,246	1,221,587
Special mention		729	4,186	-	2,950	7,865
Substandard		2,298	4,917	-	3,958	11,173
Doubtful		-	-	-	-	-
	$	392,896	481,865	75,710	290,154	1,240,625

	December 31, 2018
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Pass	$	363,621	400,266	84,411	266,898	1,115,196
Special mention		296	118	-	2,971	3,385
Substandard		3,101	3,912	-	3,111	10,124
Doubtful		-	-	-	-	-
	$	367,018	404,296	84,411	272,980	1,128,705

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


	September 30, 2019
	Owner		Non-owner
(dollars in thousands)	occupied RE		occupied RE	Construction	Business	Total
Current	$	392,053	479,595	75,710	289,682	1,237,040
30-59 days past due		843	102	-	274	1,219
60-89 days past due		-	2,168	-	-	2,168
Greater than 90 Days		-	-	-	198	198
	$	392,896	481,865	75,710	290,154	1,240,625

	December 31, 2018
	Owner		Non-owner
	occupied RE		occupied RE	Construction	Business	Total
Current	$	367,018	404,179	84,411	272,864	1,128,472
30-59 days past due		-	117	-	36	153
60-89 days past due		-	-	-	-	-
Greater than 90 Days		-	-	-	80	80
	$	367,018	404,296	84,411	272,980	1,128,705

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.


	September 30, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	341,367	170,749	49,548	26,843	588,507
Special mention		1,562	665	-	228	2,455
Substandard		3,583	3,197	-	60	6,840
Doubtful		-	-	-	-	-
	$	346,512	174,611	49,548	27,131	597,802

	December 31, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Pass	$	314,586	162,626	37,925	23,586	538,723
Special mention		1,792	864	-	139	2,795
Substandard		4,565	2,447	-	97	7,109
Doubtful		-	-	-	-	-
	$	320,943	165,937	37,925	23,822	548,627

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


	September 30, 2019
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	345,720	173,536	49,548	27,064	595,868
30-59 days past due		-	363	-	67	430
60-89 days past due		187	482	-	-	669
Greater than 90 Days		605	230	-	-	835
	$	346,512	174,611	49,548	27,131	597,802

	December 31, 2018
(dollars in thousands)	Real estate		Home equity	Construction	Other	Total
Current	$	317,267	165,727	37,925	23,603	544,522
30-59 days past due		2,555	30	-	106	2,691
60-89 days past due		923	-	-	113	1,036
Greater than 90 Days		198	180	-	-	378
	$	320,943	165,937	37,925	23,822	548,627

As of September 30, 2019 and December 31, 2018, loans 30 days or more past due represented 0.30% and 0.26% of the Company’s total loan portfolio, respectively. Commercial loans 30 days or more past due were 0.19% and 0.01% of the Company’s total loan portfolio as of September 30, 2019 and December 31, 2018, respectively, while consumer loans 30 days or more past due were 0.11% and 0.25% of total loans as of September 30, 2019 and December 31, 2018, 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)	September 30, 2019			December 31, 2018
Commercial
Owner occupied RE	$	-		-
Non-owner occupied RE		1,963		210
Construction		-		-
Business		198		81
Consumer
Real estate		1,637		1,980
Home equity		467		1,006
Construction		-		-
Other		-		12
Nonaccruing troubled debt restructurings		2,763		2,541
Total nonaccrual loans, including nonaccruing TDRs		7,028		5,830
Other real estate owned		-		-
Total nonperforming assets	$	7,028		5,830
Nonperforming assets as a percentage of:
Total assets		0.32	%	0.31	%
Gross loans		0.38	%	0.35	%
Total loans over 90 days past due	$	1,033		458
Loans over 90 days past due and still accruing		-		-
Accruing troubled debt restructurings		5,791		6,742

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.


			September 30, 2019
			Recorded investment
					Impaired loans	Impaired loans
	Unpaid				with no related	with related	Related
	Principal			Impaired	allowance for	allowance for	allowance for
(dollars in thousands)	Balance			loans	loan losses	loan losses	loan losses
Commercial
Owner occupied RE	$	2,787		2,723	2,277	446	75
Non-owner occupied RE		4,474		4,034	2,409	1,625	416
Construction		-		-	-	-	-
Business		2,187		1,724	570	1,154	470
Total commercial		9,448		8,481	5,256	3,225	961
Consumer
Real estate		2,674		2,534	1,434	1,100	438
Home equity		2,267		1,654	1,242	412	98
Construction		-		-	-	-	-
Other		150		150	-	150	17
Total consumer		5,091		4,338	2,676	1,662	553
Total	$	14,539		12,819	7,932	4,887	1,514


			December 31, 2018
			Recorded investment
					Impaired loans	Impaired loans
		Unpaid			with no related	with related	Related
		Principal		Impaired	allowance for	allowance for	allowance for
(dollars in thousands)		Balance		loans	loan losses	loan losses	loan losses
Commercial
Owner occupied RE	$	2,827		2,762	2,311	451	75
Non-owner occupied RE		3,321		2,807	603	2,204	558
Construction		-		-	-	-	-
Business		3,745		2,520	515	2,005	895
Total commercial		9,893		8,089	3,429	4,660	1,528
Consumer
Real estate		2,993		2,892	1,494	1,398	456
Home equity		1,935		1,421	1,421	-	-
Construction		-		-	-	-	-
Other		170		170	-	170	30
Total consumer		5,098		4,483	2,915	1,568	486
Total	$	14,991		12,572	6,344	6,228	2,014

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
	September 30, 2019			September 30, 2018
	Average		Recognized	Average	Recognized
	recorded		interest	recorded	interest
(dollars in thousands)	investment		income	investment	income
Commercial
Owner occupied RE	$	2,728	27	2,786	41
Non-owner occupied RE		4,077	74	3,048	29
Construction		-	-	-	-
Business		1,738	14	2,965	44
Total commercial		8,543	115	8,799	114
Consumer
Real estate		2,876	30	2,850	34
Home equity		1,668	30	1,273	17
Construction		-	-	-	-
Other		151	2	162	1
Total consumer		4,695	62	4,285	52
Total	$	13,238	177	13,084	166


	Nine months ended			Nine months ended		Year ended
	September 30, 2019			September 30, 2018		December 31, 2018
	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	$	2,742	96	2,792	103	2,784	142
Non-owner occupied RE		4,139	202	3,070	127	2,860	174
Construction		-	-	-	-	-	-
Business		1,766	61	3,031	123	2,883	162
Total commercial		8,647	359	8,893	353	8,527	478
Consumer
Real estate		3,062	97	2,871	114	2,930	151
Home equity		1,688	82	1,283	61	1,453	99
Construction		-	-	-	-	-	-
Other		154	4	164	4	174	5
Total consumer		4,904	183	4,318	179	4,557	255
Total	$	13,551	542	13,211	532	13,084	733

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 September 30, 2019
	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	$	2,808		4,016		569		3,623		3,104		1,409	318	297		16,144
Provision for loan losses		(75	)	237		(63	)	588		(93	)	14	8	34		650
Loan charge-offs		-		(225	)	-		(709	)	-		-	-	(29	)	(963	)
Loan recoveries		-		-		-		8		7		1	-	1		17
Net loan charge-offs		-		(225	)	-		(701	)	7		1	-	(28	)	(946	)
Balance, end of period	$	2,733		4,028		506		3,510		3,018		1,424	326	303		15,848
Net charge-offs to average loans (annualized)																0.21	%
Allowance for loan losses to gross loans																0.86	%
Allowance for loan losses to nonperforming loans																225.51	%


	Three months ended September 30, 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	$	2,699		3,581		544		3,849		3,446		1,431		282		268		16,100
Provision for loan losses		71		379		(44	)	(17	)	89		(93	)	(7	)	22		400
Loan charge-offs		-		-		-		(536	)	-		-		-		(20	)	(556	)
Loan recoveries		-		25		-		89		1		80		-		1		196
Net loan charge-offs		-		25		-		(447	)	1		80		-		(19	)	(360	)
Balance, end of period	$	2,770		3,985		500		3,385		3,536		1,418		275		271		16,140
Net charge-offs to average loans (annualized)																		0.09	%
Allowance for loan losses to gross loans																		1.00	%
Allowance for loan losses to nonperforming loans																		270.53	%

	Nine months ended September 30, 2019
	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	$	2,726		3,811		615		3,616		3,081		1,348		275		290		15,762
Provision for loan losses		117		454		(109	)	577		(99	)	174		51		85		1,250
Loan charge-offs		(110	)	(239	)	-		(709	)	-		(100	)	-		(82	)	(1,240	)
Loan recoveries		-		2		-		26		36		2		-		10		76
Net loan charge-offs		(110	)	(237	)	-		(683	)	36		(98	)	-		(72	)	(1,164	)
Balance, end of period	$	2,733		4,028		506		3,510		3,018		1,424		326		303		15,848
Net charge-offs to average loans (annualized)																		0.09	%

	Nine months ended September 30, 2018
	Commercial									Consumer
	Owner			Non-owner
	occupied			occupied						Real		Home
	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		236		857		175		(31	)	114		(157	)	65		41		1,300
Loan charge-offs		-		(234	)	-		(655	)	(76	)	(140	)	-		(54	)	(1,159	)
Loan recoveries		-		132		-		223		3		115		-		3		476
Net loan charge-offs		-		(102	)	-		(432	)	(73	)	(25	)	-		(51	)	(683	)
Balance, end of period	$	2,770		3,985		500		3,385		3,536		1,418		275		271		16,140
Net charge-offs to average loans (annualized)																		0.06	%

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


	September 30, 2019
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	961	553	1,514	8,481	4,338	12,819
Collectively evaluated		9,816	4,518	14,334	1,232,144	593,464	1,825,608
Total	$	10,777	5,071	15,848	1,240,625	597,802	1,838,427

	December 31, 2018
	Allowance for loan losses				Recorded investment in loans
(dollars in thousands)	Commercial		Consumer	Total	Commercial	Consumer	Total
Individually evaluated	$	1,528	486	2,014	8,089	4,483	12,572
Collectively evaluated		9,240	4,508	13,748	1,120,616	544,144	1,664,760
Total	$	10,768	4,994	15,762	1,128,705	548,627	1,677,332