Note 4 - Loans and Allowance for Loan Losses

Categories of loans include:

	(Dollars in Thousands)
	June 30, 2016			December 31, 2015
Commercial	$	55,132		$	53,516
Commercial real estate:
Construction	28,511			24,167
Other	178,337			169,290
Residential real estate	81,306			79,680
Consumer:
Auto	1,242			1,425
Other	2,485			2,704

Total loans	347,013			330,782
Less allowance for loan losses	(4,949		)	(4,916		)

Net loans	$	342,064		$	325,866

The following table sets forth an analysis of our allowance for loan losses for the three months ending June 30, 2016 and 2015.

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2016
Allowance for loan losses:
Beginning balance	$	745		$	3,585		$	602		$	24		$	88		$	5,044
Provision (credit) for loan losses	(301		)	257			4			(5		)	(40		)	(85		)
Loans charged-off	(5		)	(52		)	(15		)	—			—			(72		)
Recoveries	25			25			9			3			—			62


Total ending allowance balance	$	464		$	3,815		$	600		$	22		$	48		$	4,949


	(Dollars in Thousands)

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total

June 30, 2015
Allowance for loan losses:
Beginning balance	$	1,035		$	3,206		$	519		$	41		$	146		$	4,947
Provision for loan losses	(233		)	398			(43		)	8			(10		)	120
Loans charged-off	(75		)	—			(32		)	(16		)	—			(123		)
Recoveries	30			1			3			5			—			39


Total ending allowance balance	$	757		$	3,605		$	447		$	38		$	136		$	4,983

The following table sets forth an analysis of our allowance for loan losses for the six months ending June 30, 2016 and 2015.

	(Dollars in Thousands)
	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total
June 30, 2016
Allowance for loan losses:
Beginning balance	$	812		$	3,431		$	524		$	28		$	121		$	4,916
Provision (credit) for loan losses	(475		)	386			86			(10		)	(73		)	(85		)
Loans charged-off	(5		)	(52		)	(23		)	—			—			(80		)
Recoveries	132			50			13			4			—			199


Total ending allowance balance	$	464		$	3,815		$	600		$	22		$	48		$	4,949


	(Dollars in Thousands)

	Commercial			Commercial Real Estate			Residential Real Estate			Consumer			Unallocated			Total

June 30, 2015
Allowance for loan losses:
Beginning balance	$	1,029		$	3,088		$	582		$	45		$	141		$	4,885
Provision for loan losses	(248		)	533			(86		)	6			(5		)	200
Loans charged-off	(75		)	(17		)	(56		)	(19		)	—			(167		)
Recoveries	51			1			7			6			—			65


Total ending allowance balance	$	757		$	3,605		$	447		$	38		$	136		$	4,983

The following tables present the balance in the allowance for loan losses and the recorded investment in loans by portfolio segment and based on the impairment method as of June 30, 2016 and December 31, 2015, which includes net deferred loan fees. As of June 30, 2016 and December 31, 2015, accrued interest receivable of $1.2 million and $1.3 million, respectively, are not considered significant and therefore not included in the recorded investment in loans presented in the following tables.

	(Dollars in Thousands)
	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total
June 30, 2016
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	35	$	195	$	25	$	1	$	—	$	256
Collectively evaluated	429		3,620		575		21		48		4,693

Total ending allowance balance	$	464	$	3,815	$	600	$	22	$	48	$	4,949

Loans:
Individually evaluated for impairment	$	133	$	1,580	$	744	$	28	$	—	$	2,485
Collectively evaluated	54,999		205,268		80,562		3,699		—		344,528

Total ending loans balance	$	55,132	$	206,848	$	81,306	$	3,727	$	—	$	347,013


	(Dollars in Thousands)

	Commercial		Commercial Real Estate		Residential Real Estate		Consumer		Unallocated		Total

December 31, 2015
Allowance for loan losses:
Ending allowance balance attributable to loans:
Individually evaluated for impairment	$	36	$	377	$	20	$	—	$	—	$	433
Collectively evaluated	776		3,054		504		28		121		4,483

Total ending allowance balance	$	812	$	3,431	$	524	$	28	$	121	$	4,916

Loans:
Individually evaluated for impairment	$	145	$	2,066	$	807	$	9	$	—	$	3,027
Collectively evaluated	53,371		191,391		78,873		4,120		—		327,755

Total ending loans balance	$	53,516	$	193,457	$	79,680	$	4,129	$	—	$	330,782

The following table presents information related to impaired loans by class of loans as of June 30, 2016 and December 31, 2015. In this table presentation the unpaid principal balance of the loans has not been reduced by partial net charge-offs and the recorded investment of the loans was reduced by partial net charge-offs.

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						December 31, 2015
	Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated		Unpaid Principal Balance		Recorded Investment		Allowance for Loan Losses Allocated
With no related allowance recorded:
Commercial	$	58	$	58	$	—	$	61	$	61	$	—
Commercial real estate:
Other	611		611		—		643		643		—
Residential real estate	692		692		—		700		700		—
Consumer:
Other	—		—		—		—		—		—

Subtotal	$	1,361	$	1,361	$	—	$	1,404	$	1,404	$	—

With an allowance recorded:
Commercial	$	75	$	75	$	35	$	84	$	84	$	36
Commercial real estate:
Other	969		969		195		1,423		1,423		377
Residential real estate	52		52		25		107		107		20
Consumer:
Other	28		28		1		9		9		—

Subtotal	$	1,124	$	1,124	$	256	$	1,623	$	1,623	$	433

Total	$	2,485	$	2,485	$	256	$	3,027	$	3,027	$	433

Information on impaired loans for the three months ending June 30, 2016 and 2015 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						June 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Commercial	$	135	$	3	$	3	$	1,893	$	24	$	22
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,584		21		21		1,916		17		13
Residential real estate	747		8		8		1,014		12		9
Consumer:
Auto	—		—		—		—		—		—
Other	25		—		—		11		—		—


Total	$	2,491	$	32	$	32	$	4,834	$	53	$	44

Information on impaired loans for the six months ending June 30, 2016 and 2015 is as follows:

	(Dollars in Thousands)						(Dollars in Thousands)
	June 30, 2016						June 30, 2015
	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

Commercial	$	139	$	6	$	6	$	1,972	$	49	$	45
Commercial real estate:
Construction	—		—		—		—		—		—
Other	1,604		41		41		1,922		31		32
Residential real estate	749		16		15		1,019		25		18
Consumer:
Auto	—		—		—		—		—		—
Other	18		1		1		11		—		—


Total	$	2,510	$	64	$	63	$	4,924	$	105	$	95

The recorded investment in nonaccrual and loans past due over 90 days still on accrual by class of loans as of June 30, 2016 and December 31, 2015 are summarized below:

	(Dollars in Thousands)				(Dollars in Thousands)
	June 30, 2016				December 31, 2015
	Loans Past Due Over 90 Days and Still Accruing		Nonaccrual		Loans Past Due Over 90 Days and Still Accruing		Nonaccrual

Commercial	$	150	$	—	$	—	$	—
Commercial real estate:
Construction	—		—		—		—
Other	—		—		—		439
Residential real estate	—		49		—		98
Consumer:
Auto	—		—		—		—
Other	—		—		—		—


Total	$	150	$	49	$	—	$	537

Nonaccrual loans and loans past due 90 days still on accrual include individually classified impaired loans.

The following tables present the aging of the recorded investment in past due loans as of June 30, 2016 and December 31, 2015 by class of loans. Non-accrual loans are included and have been categorized based on their payment status:

	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
June 30, 2016
Commercial	$	88	$	—	$	150	$	238	$	54,894	$	55,132
Commercial real estate:
Construction	—		—		—		—		28,511		28,511
Other	—		—		—		—		178,337		178,337
Residential real estate	—		14		49		63		81,243		81,306
Consumer:
Auto	—		—		—		—		1,242		1,242
Other	—		—		—		—		2,485		2,485


Subtotal	$	88	$	14	$	199	$	301	$	346,712	$	347,013

	(Dollars in Thousands)
	30-59 Days Past Due		60-89 Days Past Due		Over 90 Days Past Due		Total Past Due		Current		Total
December 31, 2015
Commercial	$	—	$	—	$	—	$	—	$	53,516	$	53,516
Commercial real estate:
Construction	—		—		—		—		24,167		24,167
Other	178		—		439		617		168,673		169,290
Residential real estate	329		—		98		427		79,253		79,680
Consumer:
Auto	1		—		—		1		1,424		1,425
Other	—		—		—		—		2,704		2,704


Subtotal	$	508	$	—	$	537	$	1,045	$	329,737	$	330,782

Troubled Debt Restructurings:

The Company reported total troubled debt restructurings of $2.4 million and $2.5 million as of June 30, 2016 and December 31, 2015, respectively. The Company has no commitments to lend additional amounts to customers with outstanding loans that are classified as troubled debt restructurings. Troubled debt restructurings are included in impaired loans. The modifications of the terms of these loans included reducing the interest rate, granting an interest only payment period, or extending the terms of the debt for customers experiencing financial difficulties. Of the 12 troubled debt restructurings reported at quarter end, all loans were on accrual status.

The following table presents loans by class modified as troubled debt restructurings that occurred during the quarter ending June 30, 2016 and 2015.

		(Dollars in Thousands)					(Dollars in Thousands)
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	June 30, 2016					June 30, 2015
Troubled Debt Restructurings:
Commercial real estate:
Other	—	—		—		2	$	1,547	$	1,547
Consumer	1	$	7	$	7	—	—		—


Total	1	$	7	$	7	2	$	1,547	$	1,547

The following table presents loans by class modified as troubled debt restructurings that occurred year to date June 30, 2016 and 2015.

		(Dollars in Thousands)					(Dollars in Thousands)
	Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment		Number of Loans	Pre- Modification Outstanding Recorded Investment		Post- Modification Outstanding Recorded Investment
	June 30, 2016					June 30, 2015
Troubled Debt Restructurings:
Commercial real estate:
Other	—	—		—		2	$	1,547	$	1,547
Consumer	2	21		21		—	—		—


Total	2	$	21	$	21	2	$	1,547	$	1,547

Specific allocations of $231,000 and $243,000 were reported for troubled debt restructurings as of June 30, 2016 and June 30, 2015. One troubled debt restructuring of $3,000 was charged-off in the three and six months ending June 30, 2016. No payment defaults or charge-offs were reported for troubled debt restructurings during the three and six months ending June 30, 2015.

The terms of certain other loans were modified during the six months ending June 30, 2016 and 2015 that did not meet the definition of a troubled debt restructuring. These loans modified during the six months ending June 30, 2016 have a total recorded investment of $13.1 million as of June 30, 2016. These loans modified during the six months ending June 30, 2015 have a total recorded investment of $9.5 million as of June 30, 2015. The modification of these loans involved either a modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

In order to determine whether a borrower is experiencing financial difficulty, an evaluation is performed of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under the Company’s internal underwriting policy.

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial and commercial real estate loans with an outstanding balance greater than $25 thousand and is reviewed on a monthly basis. For residential real estate and consumer loans the analysis primarily involves monitoring the past due status of these loans and at such time that these loans are past due, the Company evaluates the loans to determine if a change in risk category is warranted. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loans not meeting the criteria above that are analyzed individually as part of the above described process are considered to be Pass rated loans. All loans in all loan categories are assigned risk ratings. Based on the most recent analyses performed, the risk category of loans by class of loans is as follows:

	Pass		Special Mention		Substandard		Doubtful		Total
June 30, 2016
Commercial	$	55,053	$	—	$	79	$	—	$	55,132
Commercial real estate:
Construction	28,511		—		—		—		28,511
Other	171,830		763		5,744		—		178,337
Residential real estate	80,788		—		518		—		81,306
Consumer:
Auto	1,242		—		—		—		1,242
Other	2,474		—		11		—		2,485

Total	$	339,898	$	763	$	6,352	$	—	$	347,013

	Pass		Special Mention		Substandard		Doubtful		Total
December 31, 2015
Commercial	$	53,316	$	—	$	200	$	—	$	53,516
Commercial real estate:
Construction	24,167		—		—		—		24,167
Other	159,829		5,753		3,708		—		169,290
Residential real estate	79,033		—		647		—		79,680
Consumer:
Auto	1,425		—		—		—		1,425
Other	2,697		—		7		—		2,704


Total	$	320,467	$	5,753	$	4,562	$	—	$	330,782