CREDIT QUALITY ASSESSMENT

12 Months Ended

Dec. 31, 2016

Credit Quality Assessment [Abstract]

Note 5 – CREDIT QUALITY ASSESSMENT

Allowance for Loan Losses

Credit risk can vary significantly as losses, as a percentage of outstanding loans, can vary widely during economic cycles and are sensitive to changing economic conditions. The amount of loss in any particular type of loan can vary depending on the purpose of the loan and the underlying collateral securing the loan. Collateral securing commercial loans can range from accounts receivable to equipment to improved or unimproved real estate depending on the purpose of the loan. Home mortgage and home equity loans and lines are typically secured by first or second liens on residential real estate. Consumer loans may be secured by personal property, such as auto loans or they may be unsecured loan products.

Management has an internal credit process in place to maintain credit standards. This process along with an in-house loan administration, accompanied by oversight and review procedures, combines to control and manage credit risk. The primary purpose of loan underwriting is the evaluation of specific lending risks that involves the analysis of the borrower’s ability to service the debt as well as the assessment of the value of the underlying collateral. Oversight and review procedures include the monitoring of the portfolio credit quality, early identification of potential problem credits and the management of the problem credits. As part of the oversight and review process, the Company maintains an allowance for loan losses (the “allowance”) to absorb estimated and probable losses in the loan portfolio. The allowance is based on consistent, periodic review and evaluation of the loan portfolio, along with ongoing, monthly assessments of the probable losses and problem credits in each portfolio. While portions of the allowance are attributed to specific portfolio segments, the entire allowance is available to absorb credit losses inherent in the total loan portfolio.

Summary information on the allowance for loan loss activity for the years ended December 31 is provided in the following table:

(In thousands)			2016		2015		2014
Balance at beginning of year			$	40,895	$	37,802	$	38,766
	Provision for loan losses			5,546		5,371		(163)
	Loan charge-offs			(3,134)		(3,795)		(2,687)
	Loan recoveries			760		1,517		1,886
		Net charge-offs		(2,374)		(2,278)		(801)
Balance at period end			$	44,067	$	40,895	$	37,802

The following tables provide information on the activity in the allowance for loan losses by the respective loan portfolio segment for the years ended December 31:

		2016
				Commercial Real Estate								Residential Real Estate
								Commercial
		Commercial		Commercial		Commercial		Owner				Residential		Residential
(Dollars in thousands)		Business		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Balance at beginning of year		$	6,529	$	4,691	$	10,440	$	7,984	$	3,456	$	6,901	$	894	$	40,895
Provision (credit)			1,563		(31)		2,563		(104)		112		1,406		37		5,546
Charge-offs			(597)		(48)		(197)		-		(888)		(1,404)		-		(3,134)
Recoveries			44		40		133		5		148		358		32		760
	Net charge-offs		(553)		(8)		(64)		5		(740)		(1,046)		32		(2,374)
Balance at end of period		$	7,539	$	4,652	$	12,939	$	7,885	$	2,828	$	7,261	$	963	$	44,067
Total loans		$	467,286	$	308,279	$	928,113	$	775,552	$	456,657	$	841,692	$	150,229	$	3,927,808
Allowance for loans to total loans ratio			1.61%		1.51%		1.39%		1.02%		0.62%		0.86%		0.64%		1.12%

Balance of loans specifically evaluated for impairment		$	7,018	$	137	$	8,107	$	5,567		na.	$	3,263	$	-	$	24,092
Allowance for loans specifically evaluated for impairment		$	2,604	$	-	$	1,736	$	485		na.	$	-	$	-	$	4,825
Specific allowance to specific loans ratio			37.10%		0.00%		21.41%		8.71%		na.		na.		na.		20.03%

Balance of loans collectively evaluated		$	460,268	$	308,142	$	920,006	$	769,985	$	456,657	$	838,429	$	150,229	$	3,903,716
Allowance for loans collectively evaluated		$	4,935	$	4,652	$	11,203	$	7,400	$	2,828	$	7,261	$	963	$	39,242
Collective allowance to collective loans ratio			1.07%		1.51%		1.22%		0.96%		0.62%		0.87%		0.64%		1.01%

		2015
				Commercial Real Estate										Residential Real Estate
								Commercial
		Commercial		Commercial		Commercial		Owner						Residential		Residential
(Dollars in thousands)		Business		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Balance at beginning of year		$	5,852	$	4,267	$	9,784	$	7,143	$	9	$	3,592	$	6,232	$	923	$	37,802
Provision (credit)			508		583		727		1,881		(5)		619		1,138		(80)		5,371
Charge-offs			(306)		(739)		(91)		(1,043)		(4)		(998)		(614)		-		(3,795)
Recoveries			475		580		20		3		-		243		145		51		1,517
	Net charge-offs		169		(159)		(71)		(1,040)		(4)		(755)		(469)		51		(2,278)
Balance at end of period		$	6,529	$	4,691	$	10,440	$	7,984	$	-	$	3,456	$	6,901	$	894	$	40,895

Total loans		$	465,765	$	255,980	$	719,084	$	678,027	$	-	$	450,875	$	796,358	$	129,281	$	3,495,370
Allowance for loans total loans ratio			1.40%		1.83%		1.45%		1.18%		na.		0.77%		0.87%		0.69%		1.17%

Balance of loans specifically evaluated for impairment		$	5,273	$	194	$	10,441	$	6,580		na.		na.	$	6,439	$	-	$	28,927
Allowance for loans specifically evaluated for impairment		$	1,318	$	58	$	1,489	$	510		na.		na.	$	-	$	-	$	3,375
Specific allowance to specific loans ratio			25.00%		29.90%		14.26%		7.75%		na.		na.		na.		na.		11.67%

Balance of loans collectively evaluated		$	460,492	$	255,786	$	708,643	$	671,447		na.	$	450,875	$	789,919	$	129,281	$	3,466,443
Allowance for loans collectively evaluated		$	5,211	$	4,633	$	8,951	$	7,474		na.	$	3,456	$	6,901	$	894	$	37,520
Collective allowance to collective loans ratio			1.13%		1.81%		1.26%		1.11%		na.		0.77%		0.87%		0.69%		1.08%

The Company’s methodology for evaluating whether a loan is impaired begins with risk-rating credits on an individual basis and includes consideration of the borrower’s overall financial condition, payment record and available cash resources that may include the collateral value and, in a select few cases, verifiable support from financial guarantors. In measuring impairment, the Company looks primarily to the discounted cash flows of the project itself or to the value of the collateral as the primary sources of repayment of the loan. Collateral values or estimates of discounted cash flows (inclusive of any potential cash flow from guarantees) are evaluated to estimate the probability and severity of potential losses. The actual occurrence and severity of losses involving impaired credits can differ substantially from estimates.

The Company may consider the existence of guarantees and the financial strength and wherewithal of the guarantors involved in any loan relationship. Guarantees may be considered as a source of repayment based on the guarantor’s financial condition and respective payment capacity. Accordingly, absent a verifiable payment capacity, a guarantee alone would not be sufficient to avoid classifying the loan as impaired.

Management has established a credit process that dictates that procedures be performed to monitor impaired loans between the receipt of an original appraisal and the updated appraisal. These procedures include the following:

An internal evaluation is updated quarterly to include borrower financial statements and/or cash flow projections.
The borrower may be contacted for a meeting to discuss an updated or revised action plan which may include a request for additional collateral.
Re-verification of the documentation supporting the Company’s position with respect to the collateral securing the loan.
At the monthly credit committee meeting the loan may be downgraded.
Upon receipt of the updated appraisal or based on an updated internal financial evaluation, the loan balance is compared to the appraisal and a specific allowance is determined for the particular loan, typically for the amount of the difference between the appraisal and the loan balance.
The Company will specifically reserve for or charge-off the excess of the loan amount over the amount of the appraisal. In certain cases the Company may establish a larger reserve due to knowledge of current market conditions or the existence of an offer for the collateral that will facilitate a more timely resolution of the loan.

The Company generally follows a policy of not extending maturities on non-performing loans under existing terms. Certain performing loans that have displayed some inherent weakness in the underlying collateral values, an inability to comply with certain loan covenants which do not affect the performance of the credit or other identified weakness may have their terms extended on an exception basis. Maturity date extensions only occur under revised terms that place the Company in a better position to fully collect the loan under the contractual terms and /or terms at the time of the extension that may eliminate or mitigate the inherent weakness in the loan. These terms may incorporate, but are not limited to additional assignment of collateral, significant balance curtailments/liquidations and assignments of additional project cash flows. Documented or demonstrated guarantees may be a consideration in the extension of loan maturities. As a general matter, the Company does not view extension of a loan to be a satisfactory approach to resolving non-performing credits.

Loans that have their terms restructured (e.g., interest rates, loan maturity date, payment and amortization period, etc.) in circumstances that provide payment relief or other concessions to a borrower experiencing financial difficulty are considered trouble debt restructured loans. All restructurings that constitute concessions to a troubled borrower are considered impaired loans that may either be in accruing status or non-accruing status. Non-accruing restructured loans may return to accruing status provided there is a sufficient period of payment performance in accordance with the restructure terms. Loans may be removed from the restructured category in the year subsequent to the restructuring if their revised loans terms are considered to be consistent with terms that can be obtained in the credit market for loans with comparable risk. At December 31, 2016, restructured loans totaled $9.2 million, of which $2.5 million were accruing and $6.7 million were non-accruing. The Company has commitments to lend $0.1 million in additional funds on loans that have been restructured at December 31, 2016. Restructured loans at December 31, 2015 totaled $11.4 million, of which $4.5 million were accruing and $6.9 million were non-accruing. Commitments to lend additional funds on loans that have been restructured at December 31, 2015 amounted to $0.1 million.

The following table provides summary information regarding impaired loans at December 31 and for the years then ended:

(In thousands)		2016		2015		2014
Impaired loans with a specific allowance		$	13,563	$	14,208	$	11,411
Impaired loans without a specific allowance			10,529		14,719		18,008
	Total impaired loans	$	24,092	$	28,927	$	29,419

Allowance for loan losses related to impaired loans		$	4,825	$	3,375	$	2,894
Allowance for loan related to loans collectively evaluated			39,242		37,520		34,908
	Total allowance for loan losses	$	44,067	$	40,895	$	37,802

Average impaired loans for the period		$	26,382	$	29,828	$	34,331
Contractual interest income due on impaired loans during the period		$	2,082	$	2,527	$	2,339
Interest income on impaired loans recognized on a cash basis		$	511	$	961	$	773
Interest income on impaired loans recognized on an accrual basis		$	186	$	274	$	280

The following tables present the recorded investment with respect to impaired loans, the associated allowance by the applicable portfolio segment and the principal balance of the impaired loans prior to amounts charged-off at December 31 for the years indicated:

			2016
					Commercial Real Estate								Total Recorded
									Commercial		All		Investment in
					Commercial		Commercial		Owner		Other		Impaired
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
		Non-accruing	$	2,807	$	-	$	7,029	$	1,884	$	-	$	11,720
		Restructured accruing		1,140		-		-		-		-		1,140
		Restructured non-accruing		64		-		-		639		-		703
	Balance		$	4,011	$	-	$	7,029	$	2,523	$	-	$	13,563

	Allowance		$	2,604	$	-	$	1,736	$	485	$	-	$	4,825

Impaired loans without a specific allowance
		Non-accruing	$	1,562	$	-	$	562	$	1,083	$	-	$	3,207
		Restructured accruing		45		-		-		744		560		1,349
		Restructured non-accruing		1,400		137		516		1,217		2,703		5,973
	Balance		$	3,007	$	137	$	1,078	$	3,044	$	3,263	$	10,529

Total impaired loans
		Non-accruing	$	4,369	$	-	$	7,591	$	2,967	$	-	$	14,927
		Restructured accruing		1,185		-		-		744		560		2,489
		Restructured non-accruing		1,464		137		516		1,856		2,703		6,676
	Balance		$	7,018	$	137	$	8,107	$	5,567	$	3,263	$	24,092

Unpaid principal balance in total impaired loans			$	10,082	$	4,398	$	12,805	$	7,760	$	3,971	$	39,016

	2016

			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	5,646	$	150	$	9,480	$	6,561	$	4,545	$	26,382
Contractual interest income due on impaired loans during the period	$	570	$	294	$	718	$	310	$	190
Interest income on impaired loans recognized on a cash basis	$	153	$	-	$	43	$	266	$	49
Interest income on impaired loans recognized on an accrual basis	$	107	$	-	$	-	$	37	$	42

			2015
					Commercial Real Estate								Total Recorded
									Commercial		All		Investment in
					Commercial		Commercial		Owner		Other		Impaired
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Impaired loans with a specific allowance
		Non-accruing	$	1,168	$	58	$	7,791	$	3,519	$	-	$	12,536
		Restructured accruing		876		-		-		-		-		876
		Restructured non-accruing		156		-		-		640		-		796
	Balance		$	2,200	$	58	$	7,791	$	4,159	$	-	$	14,208

	Allowance		$	1,318	$	58	$	1,489	$	510	$	-	$	3,375

Impaired loans without a specific allowance
		Non-accruing	$	974	$	-	$	518	$	793	$	2,750	$	5,035
		Restructured accruing		701		-		2,073		240		577		3,591
		Restructured non-accruing		1,398		136		59		1,388		3,112		6,093
	Balance		$	3,073	$	136	$	2,650	$	2,421	$	6,439	$	14,719

Total impaired loans
		Non-accruing	$	2,142	$	58	$	8,309	$	4,312	$	2,750	$	17,571
		Restructured accruing		1,577		-		2,073		240		577		4,467
		Restructured non-accruing		1,554		136		59		2,028		3,112		6,889
	Balance		$	5,273	$	194	$	10,441	$	6,580	$	6,439	$	28,927

Unpaid principal balance in total impaired loans			$	7,158	$	4,456	$	15,138	$	8,555	$	7,154	$	42,461

	2015

			Commercial Real Estate								Total Recorded
							Commercial		All		Investment in
			Commercial		Commercial		Owner		Other		Impaired
(In thousands)	Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Loans
Average impaired loans for the period	$	4,714	$	882	$	11,145	$	8,218	$	4,869	$	29,828
Contractual interest income due on impaired loans during the period	$	450	$	304	$	918	$	647	$	208
Interest income on impaired loans recognized on a cash basis	$	273	$	11	$	226	$	347	$	104
Interest income on impaired loans recognized on an accrual basis	$	113	$	-	$	107	$	11	$	43

Credit Quality

The following tables provide information on the credit quality of the loan portfolio by segment at December 31 for the years indicated:

		2016
				Commercial Real Estate								Residential Real Estate
								Commercial
				Commercial		Commercial		Owner				Residential		Residential
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
	Non-accrual loans	$	5,833	$	137	$	8,107	$	4,823	$	2,859	$	7,257	$	195	$	29,211
	Loans 90 days past due		-		-		-		-		-		232		-		232
	Restructured loans		1,185		-		-		744		-		560		-		2,489
Total non-performing loans			7,018		137		8,107		5,567		2,859		8,049		195		31,932
	Other real estate owned		39		365		395		637		-		475		-		1,911
Total non-performing assets		$	7,057	$	502	$	8,502	$	6,204	$	2,859	$	8,524	$	195	$	33,843

		2015
				Commercial Real Estate								Residential Real Estate
								Commercial
				Commercial		Commercial		Owner				Residential		Residential
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Non-performing loans and assets:
	Non-accrual loans	$	3,696	$	194	$	8,368	$	6,340	$	2,193	$	8,822	$	418	$	30,031
	Loans 90 days past due		-		-		-		-		-		-		-		-
	Restructured loans		1,577		-		2,073		240		-		577		-		4,467
Total non-performing loans			5,273		194		10,441		6,580		2,193		9,399		418		34,498
	Other real estate owned		39		365		433		-		690		1,215		-		2,742
Total non-performing assets		$	5,312	$	559	$	10,874	$	6,580	$	2,883	$	10,614	$	418	$	37,240

			2016
					Commercial Real Estate								Residential Real Estate
									Commercial
					Commercial		Commercial		Owner				Residential		Residential
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Consumer		Mortgage		Construction		Total
Past due loans
	31-60 days		$	663	$	896	$	850	$	1,479	$	808	$	3,969	$	-	$	8,665
	61-90 days			672		-		1,206		744		1,104		2,139		-		5,865
	> 90 days			-		-		-		-		-		232		-		232
		Total past due		1,335		896		2,056		2,223		1,912		6,340		-		14,762
	Non-accrual loan			5,833		137		8,107		4,823		2,859		7,257		195		29,211
	Current loans			460,118		307,246		917,950		768,506		451,886		828,095		150,034		3,883,835
		Total loans	$	467,286	$	308,279	$	928,113	$	775,552	$	456,657	$	841,692	$	150,229	$	3,927,808

			2015
					Commercial Real Estate										Residential Real Estate
									Commercial
					Commercial		Commercial		Owner						Residential		Residential
(In thousands)			Commercial		AD&C		Investor R/E		Occupied R/E		Leasing		Consumer		Mortgage		Construction		Total
Past due loans
	31-60 days		$	119	$	-	$	616	$	1,819	$	-	$	1,642	$	2,602	$	-	$	6,798
	61-90 days			404		-		2,200		849		-		550		986		-		4,989
	> 90 days			-		-		-		-		-		-		-		-		-
		Total past due		523		-		2,816		2,668		-		2,192		3,588		-		11,787
	Non-accrual loans			3,696		194		8,368		6,340		-		2,193		8,822		418		30,031
	Current loans			461,546		255,786		707,900		669,019		-		446,490		783,948		128,863		3,453,552
		Total loans	$	465,765	$	255,980	$	719,084	$	678,027	$	-	$	450,875	$	796,358	$	129,281	$	3,495,370

Loans are monitored for credit quality on a recurring basis. The credit quality indicators used are dependent on the portfolio segment to which the loan relates. Commercial loans and non-commercial loans have different credit quality indicators as a result of the methods used to monitor each of these loan segments.

The credit quality indicators for commercial loans are developed through review of individual borrowers on an ongoing basis. Each borrower is evaluated at least annually with more frequent evaluation of more severely criticized loans. The indicators represent the rating for loans as of the date presented based on the most recent credit review performed. These credit quality indicators are defined as follows:

Pass - A pass rated credit is not adversely classified because it does not display any of the characteristics for adverse classification.

Special mention – A special mention credit has potential weaknesses that deserve management’s close attention. If uncorrected, such weaknesses may result in deterioration of the repayment prospects or collateral position at some future date. Special mention assets are not adversely classified and do not warrant adverse classification.

Substandard – A substandard loan is inadequately protected by the current net worth and payment capacity of the obligor or of the collateral pledged, if any. Loans classified as substandard generally have a well-defined weakness, or weaknesses, that jeopardize the liquidation of the debt. These loans are characterized by the distinct possibility of loss if the deficiencies are not corrected.

Doubtful – A loan that is classified as doubtful has all the weaknesses inherent in a loan classified as substandard with added characteristics that the weaknesses make collection or liquidation in full highly questionable and improbable, on the basis of currently existing facts, conditions and values.

Loss – Loans classified as a loss are considered uncollectible and of such little value that their continuing to be carried as a loan is not warranted. This classification is not necessarily equivalent to no potential for recovery or salvage value, but rather that it is not appropriate to defer a full write-off even though partial recovery may be effected in the future.

The following tables provide information by credit risk rating indicators for each segment of the commercial loan portfolio at December 31 for the years indicated:

		2016
				Commercial Real Estate
								Commercial
				Commercial		Commercial		Owner
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Total
	Pass	$	442,725	$	308,142	$	917,255	$	758,651	$	2,426,773
	Special Mention		10,010		-		2,395		9,255		21,660
	Substandard		14,551		137		8,463		7,646		30,797
	Doubtful		-		-		-		-		-
Total		$	467,286	$	308,279	$	928,113	$	775,552	$	2,479,230

		2015
				Commercial Real Estate
								Commercial
				Commercial		Commercial		Owner
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Total
	Pass	$	447,439	$	255,786	$	706,623	$	659,281	$	2,069,129
	Special Mention		797		-		1,509		3,356		5,662
	Substandard		17,529		194		10,952		15,390		44,065
	Doubtful		-		-		-		-		-
Total		$	465,765	$	255,980	$	719,084	$	678,027	$	2,118,856

Homogeneous loan pools do not have individual loans subjected to internal risk ratings therefore, the credit indicator applied to these pools is based on their delinquency status. The following tables provide information by credit risk rating indicators for those remaining segments of the loan portfolio at December 31 for the years indicated:

			2016
					Residential Real Estate
					Residential		Residential
(In thousands)			Consumer		Mortgage		Construction		Total
	Performing		$	453,798	$	833,643	$	150,034	$	1,437,475
	Non-performing:
		90 days past due		-		232		-		232
		Non-accruing		2,859		7,257		195		10,311
		Restructured loans		-		560		-		560
Total			$	456,657	$	841,692	$	150,229	$	1,448,578

			2015
						Residential Real Estate
						Residential		Residential
(In thousands)				Consumer		Mortgage		Construction		Total
	Performing			$	448,682	$	786,959	$	128,863	$	1,364,504
	Non-performing:
		90 days past due			-		-		-		-
		Non-accruing			2,193		8,822		418		11,433
		Restructured loans			-		577		-		577
Total				$	450,875	$	796,358	$	129,281	$	1,376,514

During the year ended December 31, 2016, the Company restructured $0.6 million in loans that were designated as troubled debt restructurings. Modifications consisted principally of interest rate concessions. No modifications resulted in the reduction of the principal in the associated loan balances. Restructured loans are subject to periodic credit reviews to determine the necessity and adequacy of a specific loan loss allowance based on the collectability of the recorded investment in the restructured loan. Loans restructured during 2016 do not have significant specific reserves at December 31, 2016. For the year ended December 31, 2015, the Company restructured $1.9 million in loans. Modifications consisted principally of interest rate concessions and no modifications resulted in the reduction of the recorded investment in the associated loan balances. Loans restructured during 2015 had specific reserves of $0.5 million thousand at December 31, 2015.

The following table provides the amounts of the restructured loans at the date of restructuring for specific segments of the loan portfolio during the period indicated:

		For the Year Ended December 31, 2016
				Commercial Real Estate
								Commercial		All
				Commercial		Commercial		Owner		Other
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
	Restructured accruing	$	42	$	-	$	-	$	508	$	-	$	550
	Restructured non-accruing		-		-		-		-		-		-
Balance		$	42	$	-	$	-	$	508	$	-	$	550

Specific allowance		$	39	$	-	$	-	$	-	$	-	$	39

Restructured and subsequently defaulted		$	-	$	-	$	479	$	-	$	-	$	479

		For the Year Ended December 31, 2015
				Commercial Real Estate
								Commercial		All
				Commercial		Commercial		Owner		Other
(In thousands)		Commercial		AD&C		Investor R/E		Occupied R/E		Loans		Total
Troubled debt restructurings
	Restructured accruing	$	1,003	$	-	$	-	$	240	$	-	$	1,243
	Restructured non-accruing		-		-		-		639		-		639
Balance		$	1,003	$	-	$	-	$	879	$	-	$	1,882

Specific allowance		$	303	$	-	$	-	$	149	$	-	$	452

Restructured and subsequently defaulted		$	-	$	-	$	-	$	-	$	-	$	-

Other Real Estate Owned

Other real estate owned totaled $1.9 million and $2.7 million at December 31, 2016 and 2015, respectively. At December 31, 2016, $0.5 million of the other real estate owned was comprised of consumer mortgage loans.